1. IB Business and Management
1.6 Internal and External Growth

2. Learning Outcomes
Explain the difference between internal and external growth
Evaluate Joint Ventures, Strategic Alliances, Mergers and Takeovers as methods of achieving a firms growth objective

3. Business Growth – Why and How?

5. Why grow?
Why do you think that growth is often a key objective for firms?

6. Reasons for growth To increase profits
To achieve economies of scale and see the average cost of production decline.
To achieve a greater market share.
Personal ambition of owners/managers
To achieve security through becoming more diversified.
To survive in an increasingly competitive market.
To reduce the risk of takeover

7. Ways to Grow….. Internal Growth
A situation where a business increases its size on it’s own
Also called ‘organic growth’
External Growth
Growth involving other businesses via
Mergers
Takeovers
Strategic Alliances
Joint Ventures

8. Internal Growth Tends to be funded by retained profits, loans etc
Is considered a safe option
Is generally quite slow

9. External Growth Often involves raising large amounts of money
Allows quick growth
Is considered risky due to the problems of integrating 2 different companies
What might these problems be?

10. merger and takeovers (Both are types of integration)
What is the difference?
merger and takeovers (Both are types of integration)

11. Merger VsTakeover Merger Takeover Also known as an aquisition
mutual decision of two companies to combine and become one entity
a decision made by two "equals"
the goal of producing a company that is worth more than the sum of its parts
shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity
Also known as an aquisition
the purchase of a smaller company by a much larger one.
the purchasing company essentially finances the purchase of the target company, buying it outright from its shareholders.
Can be ‘hostile’ or ‘friendly’

12. + = + = In a picture….. Company AB Merger Company A Company B Takeover

13. Task… Read the article ‘How do mergers happen’
Write a list of the reasons why mergers and takeovers happen

14. Starbucks Video What methods are Starbucks using in order to grow?
Why is it necessary for Starbucks to launch into different formats/products?

15. Types of Integration Toyota Horizontal Integration Lateral Integration
Steel Factory
Backward
Vertical
Integration
Honda
Harley Davidson
Horizontal
Integration
Toyota
Lateral
Integration
Ice Cream
Forward
Vertical
Integration
Conglomerate
Integration
Car Dealership

16. What about Nike? Nike Horizontal Integration Lateral Integration
Backward
Vertical
Integration
Horizontal
Integration
Nike
Lateral
Integration
Forward
Vertical
Integration
Conglomerate
Integration

17. Task – Complete the table
Type of Integration
Advantages
Disadvantages
Horizontal
Lateral
Forward Vertical
Backward Vertical
Conglomerate

18. Other ways to Grow Externally
Joint Ventures and Strategic Alliances
Other ways to Grow Externally

19. What are they?
Joint Ventures

20. Joint Ventures
A joint Venture is when 2 companies agree to create a separate third joint company:
This is often:
For a finite period of time
To accomplish a specific goal
To share costs
To combine expertise

21. Joint Venture….. Company A Company A Joint Venture Company AB
Company B
Company B

22. Joint Ventures - Examples

23. Question:
Why might companies prefer a Joint Venture rather than a Merger?

24. What are they?
Strategic Alliances

25. What are Strategic Alliances?
Less of a commitment than a joint venture!
An agreement to cooperate and commit resources to achieve an agreed set of objectives
Could be with a:
Supplier
Customer
Competitor

26. Example - Starbucks

27. Franchising

28. What is a franchise?
A franchise is an agreement or license which gives a person or group of people (the franchisee) the rights to sell a product or service using the trademark of another business (the franchisor).

29. Video – How Franchises Work

30. How franchises work
The franchisee invests an amount of initial capital
The franchisor supports the franchisee with training, marketing and advice
The franchisee has to adhere to certain rules set by the franchisor
The franchisee pays an agreed percentage of their sales/profits to the franchisor

31. Task – McDonalds Franchises
Read the McDonalds Franchise Information
What would be the Pros and Cons to someone of opening a McDonalds Franchise rather than opening their own independent burger restaurant?

32. Task – Create and fill in the table
For the Franchisor
Advantages
Disadvantages
For the Franchisee

33. Homework Task
Using the internet find out information on 3 different franchise opportunities.
Find out:
The initial investment required
What ongoing costs are involved
What support they offer to franchisees
Any other additional information
Add your information to the ‘Evaluating Franchise Opportunities Sheet’
Choose which franchise opportunity you think is the best out of the 3 you picked. Justify your choice