Growth Strategy

Growth and ProfitabilityGrowth and Profitability

• Growth and a firm’s long-run average costs– shape of the LRAC curve– minimum efficient scale

• Demand considerations– nature of the product– possibilities for diversification

• Relationship between growth & profitability– how growth depends on profitability– how growth affects profitability

Constraints on GrowthConstraints on Growth

• Financial considerations– internal sources of finance– borrowing– share issue

• Shareholder confidence– problem of retaining large proportion of

profits– excessive borrowing– the takeover constraint– share performance

• the valuation ratio

Constraints on GrowthConstraints on Growth

• Demand conditions

– importance of market demand

– importance of promoting demand for the firm's product and increasing market share

• Managerial conditions

– the composition of the managerial team

– management structure

Alternative Growth StrategiesAlternative Growth Strategies

• Growth by internal expansion

– product differentiation

– vertical integration

– diversification

• Growth by external expansion: mergers and takeovers

– horizontal mergers

– vertical mergers

– conglomerate mergers

Alternative growth strategyAlternative growth strategy

GROWTH OF A FIRM

Internal expansion External expansion

(1) DifferentiationHorizontal expansion

(same product, increasein market share)

(1) Horizontal integrationMergers of firms

producing the sameproduct

(2) Vertical integrationDifferent products, butbelonging to different

stages of same product

(2) Vertical integrationMergers of firms producing at different stages of same

process

(3) ConglomerateDiversification -

introduction of totally different products

(3) ConglomerateDiversification - merger of

firms producing totally unrelated products

Growth through Vertical IntegrationGrowth through Vertical Integration

• Types of vertical integration– backward integration ('upstream'

integration)

– forward integration ('downstream' integration)

• Measuring the extent of vertical integration– primary production

– auxiliary operations

• Examples of vertically integrated firms

Growth through Vertical IntegrationGrowth through Vertical Integration

• Why vertically integrate?

– greater efficiency

• production economies

• co-ordination economies

• managerial economies

• financial economies

– reduced uncertainty

– monopoly power

– barriers to entry

Growth through Vertical IntegrationGrowth through Vertical Integration

• Problems with vertical integration– lack of flexibility– risks

• Tapered vertical integration– partial vertical integration– advantages

• better cost information• more leverage over suppliers• smaller capital outlay

– disadvantages• possible lack of economies of scale

Growth through DiversificationGrowth through Diversification

• Directions of diversification– using existing technological base &

market area– using existing technological base & new

markets– using new technological base & existing

market– using new technological base & new

markets• Why diversify?

– stability– maintaining profitability– growth

Growth through MergerGrowth through Merger

• Mergers and takeovers

– distinction between mergers and takeovers

• Motives for mergers and takeovers

– growth

– economies of scale

– monopoly power

– increased market valuation

– reduced uncertainty

Growth through MergerGrowth through Merger

• Motives for mergers and takeovers (cont.)

– opportunities

– other motives

• to avoid being taken over

• White Knight strategy

• asset stripping

• empire building

• geographical expansion

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Mergers and acquisitions involving an EU companyMergers and acquisitions involving an EU company

Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10

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Mergers and acquisitions involving an EU companyMergers and acquisitions involving an EU company

Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10

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Total number of mergers

Mergers and acquisitions involving an EU companyMergers and acquisitions involving an EU company

Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10

Growth through Strategic AllianceGrowth through Strategic Alliance

• Types of strategic alliance

– joint ventures

– consortia

– franchising

– licensing

– subcontracting

– networks

37%

27%

20%

16%

Star Alliance Oneworld Skyteam Northwest - KLM

United, Lufthansa, Singapore, Nippon,

Air Canada, US, Varig, bmi, Thai, Air New Zealand, Austrian, Asiana,

Tyrolean, Spanair, Scandinavian,

Mexicana.

American, BA, Qantas, Aer Lingus,

Cathay Pacific, Iberia, Finnair,

LanChile

Air France, Delta, Alitalia, Korean Air,

Czech Airlines, AeroMexico

Northwest, KLM, Continental,

Emirates, Malaysia, Air Pacific, Kenya,

South Africa

Airline strategic alliancesAirline strategic alliances

Figures show percentages of total

alliance capacity (2003)

Growth through Strategic AllianceGrowth through Strategic Alliance

• Why form strategic alliances?

– new markets

– risk sharing

– capital pooling