Business 9
Strategic methods: how to pursue strategies
Changes in scale
Why and how business grow?
Strategic methods: ways in which a business plans to meet its objectives
Organic growth: growth driven by internal expansion using reinvested profits, owners capital or
loans. Usually generated by:
– Gaining greater market share
– Product diversification
– Opening a new store
– International expansion
– Investing in new tech/machinery
+ a pace of growth is manageable
+ less risky, financed by profits and industry experience
+ avoids diseconomies of scale
+ management knows and understands every part of business
— pace of growth can be slow
— not necessarily able to benefit from economies of scale
— access to finance may be limited
—> firms will often grow organically to the point where they are in a financial position to integrate
with others.
External growth: integration which results in rapid business growth. Examples include:
– Merger: when two or more companies combine to form new company
– Takeover: when one company purchases another company
– Joint venture: when two businesses join together to share their knowledge, resources, skills
to form separate business entity, usually for limited period of time
– Franchising: successful business lets other people open and run own branches using its
name, products and way of doing things
Why pursue external growth?
– Acquiring another company offers new products, gain new technology, enter new markets
– Growing larger lets companies cut costs and work more efficiently, combine operations,
spread fixed costs
– Two companies combine leads to higher revenue, lower costs, better products
– Buying rivals removes competition, increases buyers market share
– Can boost profits, dividends, share prices, create higher return for investors
,Retrenchment: business deliberately reduces the size of its operations. Common reasons:
– financial strain or losses
– Intense competition eg. Nokia scale down its mobile phone business when apple and
Samsung took most of the market
– Refocusing on core activities
Managing growth
– Greiner’s Model identifies all challenges a business is likely to face as it gets older and bigger
– Growth Phase: Direction - Crisis of Leadership
Informal communication starts to fail
Business now too big for leader to get involved in everything
– Growth Phase: Delegation - Crisis of Autonomy
Business now has functional management
But founder / leader still struggling to let go
– Growth Phase: Coordination - Crisis of Control
More formal management structures in place
But new layers of hierarchy needed to keep control
, – Growth Phase: Collaboration - Crisis of Red Tape
A dangerous growth in organisational bureaucracy
Slowing decision-making & missing external changes
– Growth Phase: Alliances - Crisis of Growth
Growth slowing as business runs out of ideas
Alliances are sought (including new business owners)
Types of external growth
Types of integration
Vertical integration
– This is a merger or takeover of another firm in the supply chain or different stage of the
production process
Forward vertical integration: merger or takeover forward in the supply chain
Backward vertical integration: merger or takeover with a firm further backwards in supply chain
+ reduces cost of production
+ lower costs make firm more competitive
+ greater control over supply chain reduces risk
+ quality of raw material can be controlled
+ forward integration adds additional profit as profit from next stage of product are assimilated
+ forward integration increase bran visibility
— diseconomies of scale occur as costs increase
— culture clash between two firms that have merged
— possibly little expertise in running new firm results in inefficiencies
Strategic methods: how to pursue strategies
Changes in scale
Why and how business grow?
Strategic methods: ways in which a business plans to meet its objectives
Organic growth: growth driven by internal expansion using reinvested profits, owners capital or
loans. Usually generated by:
– Gaining greater market share
– Product diversification
– Opening a new store
– International expansion
– Investing in new tech/machinery
+ a pace of growth is manageable
+ less risky, financed by profits and industry experience
+ avoids diseconomies of scale
+ management knows and understands every part of business
— pace of growth can be slow
— not necessarily able to benefit from economies of scale
— access to finance may be limited
—> firms will often grow organically to the point where they are in a financial position to integrate
with others.
External growth: integration which results in rapid business growth. Examples include:
– Merger: when two or more companies combine to form new company
– Takeover: when one company purchases another company
– Joint venture: when two businesses join together to share their knowledge, resources, skills
to form separate business entity, usually for limited period of time
– Franchising: successful business lets other people open and run own branches using its
name, products and way of doing things
Why pursue external growth?
– Acquiring another company offers new products, gain new technology, enter new markets
– Growing larger lets companies cut costs and work more efficiently, combine operations,
spread fixed costs
– Two companies combine leads to higher revenue, lower costs, better products
– Buying rivals removes competition, increases buyers market share
– Can boost profits, dividends, share prices, create higher return for investors
,Retrenchment: business deliberately reduces the size of its operations. Common reasons:
– financial strain or losses
– Intense competition eg. Nokia scale down its mobile phone business when apple and
Samsung took most of the market
– Refocusing on core activities
Managing growth
– Greiner’s Model identifies all challenges a business is likely to face as it gets older and bigger
– Growth Phase: Direction - Crisis of Leadership
Informal communication starts to fail
Business now too big for leader to get involved in everything
– Growth Phase: Delegation - Crisis of Autonomy
Business now has functional management
But founder / leader still struggling to let go
– Growth Phase: Coordination - Crisis of Control
More formal management structures in place
But new layers of hierarchy needed to keep control
, – Growth Phase: Collaboration - Crisis of Red Tape
A dangerous growth in organisational bureaucracy
Slowing decision-making & missing external changes
– Growth Phase: Alliances - Crisis of Growth
Growth slowing as business runs out of ideas
Alliances are sought (including new business owners)
Types of external growth
Types of integration
Vertical integration
– This is a merger or takeover of another firm in the supply chain or different stage of the
production process
Forward vertical integration: merger or takeover forward in the supply chain
Backward vertical integration: merger or takeover with a firm further backwards in supply chain
+ reduces cost of production
+ lower costs make firm more competitive
+ greater control over supply chain reduces risk
+ quality of raw material can be controlled
+ forward integration adds additional profit as profit from next stage of product are assimilated
+ forward integration increase bran visibility
— diseconomies of scale occur as costs increase
— culture clash between two firms that have merged
— possibly little expertise in running new firm results in inefficiencies
