Lesson aims
- Distinguish between internal and external growth.
- Discuss the advantages and disadvantages of different external growth methods.
Organisations that do choose to grow can do so in a variety of ways. These are often categorised as either internal or external. There are advantages and disadvantages to both.
Internal growth
Internal growth includes everything an organisation undertakes on its own to expand and develop.
External growth
External growth is development that involves the participation of another organisation. That is, the company works with another company in order to expand.
In contrast with internal growth methods, external growth methods can allow companies to realise their strategic objectives more quickly and efficiently. External growth always entails working with another organisation. The external growth methods we will consider are:
- Mergers, acquisitions and takeovers
- Joint ventures
- Strategic alliances
- Franchising
A merger is a form of external growth that usually results in two firms combining to form a third entity. This new company then replaces the two that existed before the merger.
An acquisition is a form of external growth.The term acquisition implies that one firm purchases another firm.
Takeover is a term often used to describe the process that results in either a merger or an acquisition. A takeover involves one firm offering to buy the shares from the shareholders of another firm, usually at a price that exceeds their value in the stock market.
Task
- Describe two decisions that might have to be made upon the merger of two companies.
- Discuss what practices executives from different countries might disagree on.
Forbes - Why Corporate Mergers of Equals Almost Never Work
Many of the world’s best-known companies were created as the result of mergers of two large companies. In some cases, the company created retains the name of the two original enterprises. Can you match up the following to find the names of the companies created through merger?
Exxon Chase
JP Morgan SmithKline
Stanley KLM
Air France Black & Decker
Glaxo Mobil
Joint ventures, also called JVs, involve the creation of a new company by two or more 'parent' companies. The joint venture is formed in order to carry out an aim or objective that might be difficult for each of the parent companies to achieve on its own.
Case study - Royal Dutch Shell and Saudi Aramco
Oil companies often form joint ventures in order to spread the risk of developing costly assets. Royal Dutch Shell and Saudi Aramco created a joint venture, called Motiva, in the United States, which was owned 50/50 by the two parent companies. The joint venture operated three refineries as well as a distribution business in the US.
Many joint ventures come to an end by being purchased outright by one of the original partners. This was the case with this joint venture as well. In 2016, the joint venture was 'unwound' when Shell agreed to sell its share of Motivato Aramco, who will now have full ownership of the company.
- Explain what factors might have motivated Shell and Aramco to create a joint venture together.
- Discuss why Shell may have decided to sell its shares in the joint venture to Aramco.
Strategic alliances involve two or sometimes more organisations working together to realise a set of common objectives. The relationship between the companies may be spelled out in a contractual agreement; however, no new entity is created and the original organisations remain intact.
Case study - Star Alliance
An example of an alliance is the Star Alliance created by airline companies in order to provide better service to customers. Travelers can begin a voyage with one company and complete it with another, while having their baggage handled seamlessly by the two airlines. Member airlines also allow customers to accumulate 'miles' on trips taken on any of the partner airlines. Improved service to customers results in increased competitiveness for member airlines.
Current members: Adria Airways, Aegean Airlines, Air Canada, Air China, Air India, Air New Zealand, All Nippon Airways, Asiana Airlines, Austrian Airlines, Avianca, Brussels Airlines, Copa Airlines, Croatia Airlines, EgyptAir, Ethiopian Airlines, EVA Air, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Shenzhen Airlines, Singapore Airlines, South African Airways, Swiss International Air Lines, TAP Portugal, Thai Airways, Turkish Airlines, United Airlines.
- Discuss the competitive advantages that an airline might gain by joining the Star Alliance.
- Suggest possible disadvantages to an airline of participating in the Star Alliance.
A franchise is a legal agreement whereby a franchisee buys the rights to use the name and business model of a franchisor. The franchisee pays for the franchise (often both upfront fees and royalties), and must also respect the norms and practices of the franchise. The franchisor usually supports the franchisee with franchise-wide purchasing, marketing, 'best practices', and training.
Case study - Quick Restaurants
In January 2011, a 14-year-old boy died of food poisoning shortly after eating at the fast food franchise Quick in France. Although there were no other victims, it was later confirmed that his death was attributable to a lack of hygiene at the Quick restaurant. The franchiser reacted expediently by closing the restaurant and terminating the contract with the franchisee involved. Quick was later commended for its fast reaction and handling of the crisis. Nonetheless, it took months for the chain to recover its image and lost sales.
- How might this incident have impacted other Quick franchisees in France?
- What sort of evaluation should franchisers carry out of potential franchisees?
Which type of growth?
The following is a list of factors that must be taken into consideration in order to evaluate what type of growth might be suitable under different circumstances.
- Timing
- Competitive environment
- Regulatory environment
- Risk
- Proprietary information and technology
- Culture