External growth methods

The terms mergers and takeovers both describe the situation when firms join together and operate as one organisation, albeit with one important difference. The term mergers is used to describe two businesses that join to create a third new company, whereas the term takeover refers to the purchase of one business by another.

There are few different types of mergers:

Horizontal integration: firms are in exactly the same line of business and at the same stage of production.

Backward vertical integration: firms are at different stages of production. The merger occurs with a business which is in the previous stage of production.

Forward vertical integration: firms are at different stages of production. The merger occurs with a business which is in the next stage of production.

Lateral integration: merging of firms with related goods which do not compete directly with each other.

Diversifying merger (conglomerate): merging of firms in completely different lines of business.

Joint venture a type of external growth strategy that combines the contributions and responsibilities of two firms to a shared project by forming a separate legal enterprise.

The reason why firms form a joint venture is to enjoying the advantages of mergers, such as economies of scale and reduced competition, without losing their identity. Most joint ventures are friendly, allowing businesses to share their areas of expertise.

Strategic alliance an agreement between parties to pursue shared objectives while remaining independent organisations, and without forming a legal partnership entity. These are often formed to share costs and risks, information and expertise.

E.g. sharing R&D costs, manufacturing capabilities, distribution channels etc..

Franchising an arrangement where the franchisor sells the rights to sell their products or use the company name or brand to the franchisees.

External growth strategies are critical for businesses seeking to expand their market presence, diversify their operations, or enhance their competitive edge. These strategies, including mergers, takeovers, joint ventures, strategic alliances, and franchising, offer various pathways to growth by leveraging external partnerships and opportunities. Understanding these methods is essential for IB Business & Management students, as it provides insights into the strategic considerations businesses must navigate to achieve sustainable growth. This comprehensive analysis explores the different types of external growth methods, supported by industry examples.

Mergers and Takeovers

Mergers: Occur when two businesses agree to go forward as a single new company rather than remain separately owned and operated. This process is typically mutual and seen as a merger of equals.

Example: The merger between Daimler-Benz and Chrysler in 1998 aimed to create a global automotive powerhouse, although cultural differences and strategic misalignments later led to its dissolution.

Takeovers: Involve one business acquiring another, with the acquiring company effectively taking control. Takeovers can be friendly or hostile.

Example: The acquisition of Pixar by Disney in 2006 for $7.4 billion was a strategic move to combine Disney’s historic brand and distribution channels with Pixar’s cutting-edge animation technology and creative talent.

Types of Mergers

1. Horizontal Integration: This involves companies in the same industry and at the same stage of production merging.

Example: The merger between Sprint and T-Mobile in the United States aimed to create a stronger competitor in the telecom industry, pooling their resources to better compete with Verizon and AT&T.

2. Backward Vertical Integration: Occurs when a company merges with another company that is at the previous stage of production.

Example: Tesla’s acquisition of Grohmann Engineering, a company specializing in automated manufacturing systems, is an example of backward vertical integration, aiming to enhance Tesla’s production capabilities.

3. Forward Vertical Integration: This type of merger takes place between a company and another company that is at the next stage of production.

Example: Amazon’s acquisition of Whole Foods Market allowed Amazon to gain a significant footprint in the brick-and-mortar retail grocery space, integrating its e-commerce platform with physical retail locations.

4. Lateral Integration: Involves the merging of companies with related goods, but which do not directly compete with each other.

Example: Google’s acquisition of YouTube allowed Google to expand its services beyond search and advertising to include video sharing and online entertainment.

5. Diversifying Merger (Conglomerate): Merging of firms operating in completely different lines of business.

Example: Berkshire Hathaway, led by Warren Buffett, exemplifies a conglomerate merger strategy, holding a diverse portfolio of companies across various industries, from insurance to food and retail.

Joint Venture

Definition: A joint venture involves two or more firms creating a new business entity to pursue shared objectives, combining resources and capabilities.

Example: Sony Ericsson was a joint venture between Sony and Ericsson, combining Sony’s consumer electronics expertise with Ericsson’s telecommunications technology to produce mobile phones.

Strategic Alliance

Definition: A strategic alliance is a cooperative agreement between businesses to pursue shared objectives while remaining independent entities, often to share costs, risks, and expertise.

Example: Starbucks and PepsiCo formed a strategic alliance to market and distribute Starbucks ready-to-drink coffee and energy beverages in the US and Canada.

Franchising

Definition: In franchising, a franchisor sells the rights to use its brand, product, or business model to independent operators (franchisees).

Example: McDonald’s operates a global franchising model, allowing franchisees to open and manage McDonald’s restaurants, significantly expanding its global footprint.

Conclusion

External growth strategies offer businesses a spectrum of options to achieve expansion, diversification, and competitive advantage. From mergers and takeovers to joint ventures, strategic alliances, and franchising, these methods enable companies to leverage external resources and capabilities to pursue growth opportunities. The examples provided illustrate how businesses across various industries employ these strategies to navigate the complexities of the global market, highlighting the importance of strategic planning and collaboration in achieving successful external growth. For IB Business & Management students, understanding these external growth methods is crucial for analyzing business strategies and their implications for organizational growth and development.