2. What is External Growth?
External growth (also known as inorganic growth) refers to growth of a
company that results from using external resources and capabilities rather
than from internal business activities. External growth is an alternative to
internal (organic) growth. However, internal and external growth should
not be considered opposites. The main advantage of external growth over
internal growth is that the former provides a faster way to expand the
business. However, organic growth is widely regarded as a better
measure of a company’s performance than external growth.
3.
4. External Growth Strategies
Companies may pursue external growth using two primary
vehicles: mergers and acquisitions (M&A) and strategic alliances.
The main difference between the two is in regard to change of
ownership. M&A deals involve an exchange of ownership between
the companies in the transaction. Conversely, a strategic alliance
enables businesses to pursue their collective objectives while
remaining independent entities.
5. Mergers and acquisitions (M&A)
Mergers and acquisitions refer to transactions between business entities that involve a complete
exchange of ownership. A merger is a financial transaction in which two companies unite into one
new company with the approval of the boards of directors of both companies. In a merger, the
involved companies may create a completely new entity (under a new brand name) or the acquired
company may become a part of the acquiring company.
Conversely, an acquisition is a financial transaction in which the acquiring company (bidder)
purchases a controlling stake in a target company. It can be done with the consent of the
management and shareholders of a target company (friendly takeover) or without it (hostile
takeover).
Generally, M&A transactions can provide substantial benefits and growth opportunities to the
participating entities. Nevertheless, mergers and acquisitions are commonly challenging in terms of
the integration of the companies.
6. Strategic alliances
Unlike M&A transactions, strategic alliances do not involve a complete exchange of ownership
between the participating companies. Instead, companies combine their assets and resources for
a certain period of time to achieve predetermined goals while remaining independent.
A strategic alliance can take one of two forms: equity and non-equity alliances. Equity alliances
are created when independent companies become partners and establish a new entity jointly
owned by the participating partners. The most common form of an equity alliance is a joint
venture.
On the other hand, non-equity alliances are created through contracts. Examples of non-equity
alliances are franchising and licensing agreements, in which one company provides products,
services, or intellectual property to another company in exchange for a fee.
7. Uses of External Growth Strategies
A company can use external growth strategies to achieve a number of different
objectives, such as the following:
Obtain access to new markets
Increase market power
Access new technology/brand
Diversify a product or service
Increase the efficiency of business operations
8. WHAT IS JOINT VENTURE (JV)
A joint venture (JV) is a commercial enterprise in which two or
more organizations combine their resources to gain a tactical and
strategic edge in the market. Companies often enter into a joint
venture to pursue specific projects. The JV may be a new project
with similar products or services or it may involve creating an
entirely new firm with different core business activities
9. ADVANTAGES AND DISADVANTAGES
Benefits of joint ventures include:
access to new markets and distribution
networks
increased capacity
sharing of risks and costs (ie liability)
with a partner
access to new knowledge and expertise,
including specialised staff
access to greater resources, for example
technology and finance
Disadvantages of JV:
The objectives of the venture are unclear
the communication between partners is not
great
the partners expect different things from the
joint venture
the level of expertise and investment isn't
equally matched
the work and resources aren't distributed
equally
