Growth Strategy

1
Growth Strategy
2
Growth and Profitability

• Growth and a firms 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

3
Constraints 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

4
Constraints 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

5
Alternative Growth Strategies

• Growth by internal expansion
• product differentiation
• vertical integration
• diversification
• Growth by external expansion mergers and
  takeovers
• horizontal mergers
• vertical mergers
• conglomerate mergers

6
Alternative growth strategy
GROWTH OF A FIRM
Internal expansion
External expansion
(1) Differentiation Horizontal expansion (same
product, increase in market share)
(1) Horizontal integration Mergers of
firms producing the same product
(2) Vertical integration Different products,
but belonging to different stages of same product
(2) Vertical integration Mergers of firms
producing at different stages of same process
(3) Conglomerate Diversification - introduction
of totally different products
(3) Conglomerate Diversification - merger of
firms producing totally unrelated products
7
Growth 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

8
Growth through Vertical Integration

• Why vertically integrate?
• greater efficiency
• production economies
• co-ordination economies
• managerial economies
• financial economies
• reduced uncertainty
• monopoly power
• barriers to entry

9
Growth 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

10
Growth 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

11
Growth 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

12
Growth 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

13
Mergers 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
14
Mergers 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
15
Mergers 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
16
Growth through Strategic Alliance

• Types of strategic alliance
• joint ventures
• consortia
• franchising
• licensing
• subcontracting
• networks

17
Airline strategic alliances
Northwest, KLM, Continental, Emirates, Malaysia,
Air Pacific, Kenya, South Africa
United, Lufthansa, Singapore, Nippon, Air Canada,
US, Varig, bmi, Thai, Air New Zealand, Austrian,
Asiana, Tyrolean, Spanair, Scandinavian, Mexicana.
Air France, Delta, Alitalia, Korean Air, Czech
Airlines, AeroMexico
American, BA, Qantas, Aer Lingus, Cathay Pacific,
Iberia, Finnair, LanChile
Figures show percentages of total alliance
capacity (2003)
18
Growth through Strategic Alliance

• Why form strategic alliances?
• new markets
• risk sharing
• capital pooling