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External Sources of Growth - Coggle Diagram
External Sources of Growth
Takeovers
Definition: A company purchasing controlling interest in another company
\disdvantages: high costs involved, upset customers and suppliers and pricing challenges
Advantages: Increased market share, access to economies of scale, spread risks by diversifying, acquire new skills., increase international presence
Real Life Example: in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm. read more, acquisitions. Usually, companies acquire an existing business to share its customer base, operations and market presence.
Joint Ventures
Advantages: Access to new markets and networks, increased capacity, costs and risks are shared with a partner, and access to greater resources such as, technology or finance.
Disadvantages: Objectives of venture are unclear, communications between partners are not strong, the work and resources aren't distributed equally, and leadership and support is not there in the early stages.
Definition: Two or more organizations agreeing to create a new business entity usually for a finite period or time and projects.
Real Life Example: Ford and Toyota working together in 2011 to develop hybrid trucks. Toyota brings the hybrid technology knowledge, while Ford brings its leadership in the American truck market
Strategic Alliance
Advantages: Earning new clients, expand new business and revenues, different source of income, and limited risk.
Disadvantage: Earning unequal benefits, risk of the companies reputation, and conflict of culture and language barriers
Definition: When two or more companies join together to benefit from external growth without having to set up a new separate entity to their own business models.
Real Life Example: Starbuck and Brands & Noble. Starbucks brews the coffee. Barnes & Noble stocks the books. Both companies do what they do best while sharing the costs of space to the benefit of both companies.
Franchising
Definition: A person of business buys a license to trade using another firms name, logos, brands and trademarks
Disadvantages: Limited creative opportunities, Contracts are not long term/permanent, investments and start up costs can be expensive, and varied levels of support.
Advantages: no industry experience is necessary, existing customer base and brand awareness, lower risk than starting an entirely new business, and support from franchise owner.
Real Life Example: McDonalds - A company that notably grew a global presence using the franchise model is the fast-food behemoth McDonald's. McDonald's either owns the land and buildings used by the franchisees or secures long-term leases for the franchised sites.
Merges and Acquisitions
Combination of two or more businesses to form a single company. Mergers are when two forms agree to form a new company
Types of Merges and Acquisitions
Horizontal Integration
is the idea of one company operating on the same industry as the other. An example is the investment of instagram by Facebook(now called meta) in 2012.
Advantages: Reduced competition, increased market share and access to new markets.
Disadvantages: Increased capital requirements, reduced flexibility, and higher operating costs.
Vertical Integration
is a business arrangement in which a company controls the different stages of production. AN example is Apple one of the most valuable companies in the world have managed to use vertical integration in their iphone production
Advantages: Greater economies of scale, lower production costs.
Disadvantages: Increased capital requirements, reduced flexibility, and higher operating costs.
Lateral Integration
is a strategy in which a company gains ownership of other related companies in the same industry. An example is the merge of two sports brands Nike and Adidas, combining their resources they can create a larger and more efficient marketing structure.
Advantages: gaining knowledge and experience, reduced production cost, and increased revenue.
Disadvantages: Reduced flexibility and lack of research
Conglomeration Integration
is a process in which a company expands its operations to unrelated business areas. An example of this is eBay and PayPal merger, eBay bought PayPal in 2002 to provide it with streamlined process payments for its goods.
Advantages: Diversification, expansion of customer base, and increased efficiency.
Disadvantages: 1. diversification can shift focus and resources away from core operations which result in poor performance. 2. poor pricing structures, 3. ineffective corporate governance policy.