© Bruce R. Barringer Strategies for Growth

© Bruce R. Barringer

Strategies for Growth

Bruce R. Barringer

University of Central Florida

GEB 6115

Summer 2003

© Bruce R. Barringer

Internal vs. External Growth StrategiesSlide 1 of 3

• Internal Growth Strategies– Rely on efforts generated within the firm itself,

such as new product development, other product related strategies, and international expansion

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Internal vs. External Growth StrategiesSlide 2 of 3

• External Growth Strategies– Rely on establishing relationships with third

parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising.

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Internal vs. External Growth StrategiesSlide 3 of 3

Firm Growth

Internal Growth Strategies External Growth Strategies

New product development

Other product related strategies

International expansion

Merger and Acquisition

Licensing

Strategic alliances and joint ventures

Franchising(covered in Chapter 15)

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Internal Growth Strategies

Many businesses grow through internal growth strategies. Wal-Mart and Kinkos, for example, have growth almost exclusively by utilizing internal growth strategies.

The distinctive attribute of internally generated growth is that a business relies on its own competencies, expertise, business practices, and employees to find new ways to grow.

As a result, internally generated growth is often referred to as organic growth, because it does not rely on outside intervention.

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New Product Development

• New Product Development– Involves the creation and sale of new products (or

services) as a means of increasing firm revenues.– In many fast-paced industries, new product

development is a competitive necessity.• For example, the average product life cycle in the

computer software industry is 14 to 16 months.

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Risks Involved With Developing New Products

Although the development of new products can result in substantial rewards it is a high-risk strategy. According to a recent Boston Consulting Group report, only 20% of new product launches with a budget of over $25 million succeed, and 90% of all product launches attract less than one percent of market share.

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Keys To Effective New Product Development

Find a need and fill it

Develop products that add value

Get quality and pricing right

Conduct ongoing feasibility analysis

Focus on specific target markets

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Common Reasons New Products Fail

• Reasons New Products Fail– Inadequate feasibility analysis– Overestimation of market potential– Bad timing– Inadequate advertising and promotion– Stronger than expected competitor reaction– Product was overpriced– No need or consumer enthusiasm for the product

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• Improving An Existing Product or Service– An existing product or service can be improved

by enhancing quality, making it larger or smaller, making it more convenient to use, improving its durability, or making it more up-to-date.

Other Product StrategiesSlide 1 of 3

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• Increasing The Market Penetration Of An Existing Product or Service– A market penetration strategy seeks to increase

the sales of a product or service through greater marketing efforts, or through increased production capacity and efficiency.

Other Product StrategiesSlide 2 of 3

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• Extending Product Lines– A product line extension strategy involves

taking a product, and making additional versions of the product to appeal to different clientele.

Other Product StrategiesSlide 3 of 3

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Example of Product Line ExtensionOracle

“As Ellison (Oracle’s CEO) recognized that he had sold a database to almost every one of the biggest companies in the world, he knew he would need new products to sell. That is how he came up with the idea of applications. Oracle applications would sit on top of and use Oracle databases to perform functions such as inventory management, personnel record keeping, and sales tracking. The proof of his thinking took almost seven years, but by 1995, the company generated nearly $300 million in license revenues from application products and an additional $400 million in applications-related services.”

From a book on the history of Oracle.

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• Geographic Expansion– Is another internal growth strategy. Many

entrepreneurial firms grow by simply expanding from their original location to additional geographic sites.

Other Product StrategiesSlide 4 of 4

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• International Expansion– Another common form of growth for

entrepreneurial firms in international expansion.

– Approximately 95% of the world’s population and two-thirds of its total purchasing power are located outside the U.S.

International Expansion

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International Expansion

Factors to consider in assessing a firm’s overall suitability for growth via international expansion.

See handout

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External Growth Strategies

An entrepreneurial firm can grow externally by acquiring other firms, engaging in alliances and joint ventures, licensing proprietary assets to other firms, or through franchising.

The use of these strategies is becoming more prevalent, as firms increasingly are relying on acquisitions and strategic partnerships to stimulate growth.

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• Merger– A merger is the combining of two or more

firms into one, through the pooling of interests.

• Acquisition– An acquisition is the outright purchase of one

firm by another.

Mergers and Acquisitions

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Mergers and AcquisitionsCompleting the Acquisition of Another Firm

Step 1 Step 2

Step 4

Step 9Step 8Step 7

Step 5

Step 3

Step 6

Meet with the top management team of the

acquisition target

Assess the mood of the acquisition target

Identify sources of financing for the

transaction

Continue negotiationsMake an offer to

purchase if acceptable terms are available

Negotiate a non-compete agreement with the key employees of the target

firm that will be retained

Retain an attorney to prepare documents for

closing

Meet as soon as possible with all affected

employees

Implement the plan for the acquired firm

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• A Promising Acquisition Candidate Has the Following Characteristics– Operates in a growing industry– Has proprietary products and/or processes– Has a well-defined and established market

position– Has a good reputation– Is open to the idea of being acquired by another

firm

Finding An Appropriate Acquisition Candidate

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Acquisitions Don’t Always Work OutMattel and The Learning Company

Mattel decided to enter the software business in 1999, buying The Learning Company for $3.8 billion. At the same time, The Learning Company was a strong, growing business that was the clear leader in educational software. Yet the investment community was skeptical. The Learning Company exhibited slowing growth, and its cash flow from operations had declined to negative $43 million. Mattel pressed on saying, “We are truly excited about the benefits to be realized through the combination of our two great companies.” But software is in many ways a difficult business, and a true departure from the toy business. After the acquisition, The Learning Company’s performance eroded to a quarterly after-tax loss of $100 million. Mattel announced its exit from the software business one year after entering it, selling it for a price of zero.

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• Licensing– Is the granting of permission by one company

to another company to use a specific form of its intellectual property under clearly defined conditions.

– Licensing is an effective way of earning income, particularly for intellectual property rich firms, like software and biotech companies.

LicensingSlide 1 of 2

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• Licensing– The terms of a license are spelled out through a

licensing agreement, which is a formal contract between a licensor and a licensee.

• The licensor is the company that owns the intellectual property.

• The licensee is the company that is purchasing the right to use it.

LicensingSlide 2 of 2

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Advantage of Licensing

Along with generating income, a distinct advantage of licensing for entrepreneurial firms, is that it helps spread the risk and cost of developing new technologies.

For instance, Ask Jeeves, as described in the opening case, develops superior Internet search technologies. It would be expensive for Ask Jeeves to invest in new search technologies, simply to enhance its own search engine. Instead, Ask Jeeves spreads the risk and cost of its efforts, by immediately licensing the new technology to third parties, along with using it for its own purposes.

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Types of LicensingSlide 1 of 2

• Technology Licensing– Involves the licensing of proprietary technology,

which the licensor typically controls by virtue of a utility patent.

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Types of LicensingSlide 2 of 2

• Merchandise and Character Licensing– Involves the licensing of a recognized

trademark or brand, which the licensor typically controls by virtue of a registered trademark or copyright.

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Strategic Alliances and Joint Ventures

Over the past several years, strategic alliances and joint ventures have become increasingly prevalent vehicles for firm growth. Both of these forms of business partnership fall under the broader category of interorganizational relationships, which involve firms working together to achieve mutually beneficial goals.

The increase in popularity of strategic alliances and joint ventures has been driven largely by a growing awareness on the part of firms that they can’t “go it alone” and achieve success. As a result, firms are engaging in partnerships for a number of reasons, including facilitating firm growth.

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• Strategic Alliance– Is a partnership between two or more firms,

which is developed to achieve a specific objective or goal.

Strategic AlliancesSlide 1 of 2

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• Technological Alliances– Involve cooperating in areas such as R&D,

engineering, and manufacturing.

• Marketing Alliances– Typically match a company with a distribution

system that is attractive to a company that is trying to increase sales of a product or service.

Strategic AlliancesSlide 2 of 2

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Importance of AlliancesDell Computer

“As a small start-up, we didn’t have the money to build the components (used to make up a PC) ourselves. But we also asked, “Why should we want to?” Unlike many of our competitors, we actually had an option: to buy components from the specialists, leveraging the investments they had already made and allowing us to focus on what we did best—designing and delivering solutions and systems directly to consumers.”

In forging these early alliances with suppliers, we created exactly the right strategy for a fast-growing company.”

Michael Dell, Direct from Dell

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Joint VenturesSlide 1 of 2

• Joint Venture– Is an entity that is created when two or more

firms pool a portion of their resources to create a separate jointly owned organization.

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Joint VenturesSlide 2 of 2

• Scale Joint Venture– The partners collaborate at a single point in the

value chain to gain economies of scale in production or distribution to combine their expertise.

• Link Joint Venture– The positions of the partners are not

symmetrical and the objectives of the parties may diverge.