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The difference between internal and external growth

Strategic Alliances

External Growth

Franchises

similar to joint ventures since they involve businesses collaborating for a specific goal but differ several fundamental ways:

  • More than two businesses may be part of the alliance
  • No new business is created
  • Individual businesses in the alliance remain independent
  • they are more fluid as in membership can change without destroying the alliance

Franchises involves the following:

  • Franchisor - an original business that developed the business concept and product, then sells to other businesses the right to offer the concept and sell the product
  • Franchisee - businesses that buy the right to offer the concept and sell the product. Therefore, they sell the products developed y the franchisor
  • Its a rapid form of growth

Internal Growth

  • quick and riskier than internal growth
  • business expands by entering into a type of arrangement to work with another business, such as,
  • a merger and acquisition or takeover (M & A)
  • a joint venture
  • a strategic alliance
  • a franchise
  • requires external financing
  • can increase market share and decrease competition quickly

Franchisor

Franchisee

Disadvantages

Joint Ventures

  • can be individuals, partnerships, or companies
  • has knowledge on local market - helpful to franchisor if it wants to expand
  • must pay for the franchise itself then must pay royalties
  • A business that starts to franchise is the franchisor
  • A rapid form of growth because the franchisor doesn't have to produce anything new
  • Has a host or home country
  • Can sell to other businesses where it wants to expand

Franchisor will provide

Franchisees will

  • the stock
  • the fittings
  • the uniforms
  • staff training
  • legal and financial help
  • global advertising
  • global promotions
  • employ staff
  • set prices
  • set wages
  • pay an agreed royalty on sales
  • create local promotions
  • sell only the products of the franchisor
  • advertise locally

Advantages

Integration

Disadvantages

  • gains quick access to wider markets
  • makes use of local knowledge and expertise
  • does not assume the risks and liability of running the franchise
  • gains more profits and the sign-up fees
  • has unlimited liability for the franchise
  • has to pay royalties to the franchisor
  • has no control over supplies
  • makes all global decisions
  • The product exists and is usually well known
  • The format for selling the product is established
  • The set-up costs are reduced
  • The franchisee has a secure supply of stock
  • The franchisee can provide legal, financial, managerial and technical help
  • loses some control in the day-to-day running of the business
  • can see its image suffer if a franchise fails or does not perform properly

M & As

  • coordination and agreement becomes challenging
  • without legal existence it has less force than a legally extant enterprise
  • remaining indepenent results in not gaining capital strength of legal merger with other enterprises
  • they dont enjoy economies of scale
  • greater fluidity, less stability

Advantages

  • the two firms enjoy greater sales
  • Does not lose its legal existence or identity
  • can bring different areas of expertise
  • Known as organic growth
  • occurs slowly and steadily
  • occurs out of the existing operations of the business
  • business expands by selling more products or by developing product range
  • still has to borrow money from banks for major capital outlays
  • eg; update or expand property,plant, and equipment
  • mostof expansion is self-financed using retained profits
  • occurs when two businesses agree to combine resources for a specific goal and over a finite period of time
  • A separate business is created with funding by the "two" parent businesses
  • When the defined time period is over;
  • new business is either dissolved
  • incorporated into one of the parent businesses
  • or the two parent businesses decide to extend the time frame

Disadvantages

  • occurs when two business become integrated; by joining together and forming a bigger combined business (merger) or by one business taking over the other (acquisition)
  • if the company doesn't agree to the acquisition it is called "takeover" or "hostile takeover"
  • There are four reasons for integration:
  • Horizontal - when two business aren't in the same industry broadly but in the same line of business and chain of production
  • Backward Vertical - when one business integrates with another at an early stage in the chain of production (usually to protect supply chain)
  • Forward Vertical - when one business integrates in a later stage in the chain of production (ususally to secure an outlet for its products)
  • Conglomeration - when two business in unrelated lines of business integrate aka diversification (mainly to reduce overall corporate risks )
  • Advantages include : economies of scale, complementary activities, and control up or down the chain of production
  • Disadvantages include: high legal and consulting fees and a culture clash
  • Do not produce the desired outcome
  • could have accomplished the same thing without sharing profits
  • Disagreements
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