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