Corporate Growth

Organic Growth

Organic growth is the process of businesses expansion due to increasing the customer base, output per customer, and/or through new sales.

Learning Objectives

Discuss how organic growth is achieved, and the advantages and limitations of organic growth

Key Takeaways

Key Points

  • Organic growth may be negative.
  • Actions that stimulate organic growth include: changing the price; advertising and promoting; producing improved or better products; selling in different locations; offering customers preferential credit payment terms; increasing capital expenditure; and improving training and development.
  • Organic growth, as opposed to inorganic growth, allows companies to retain control and avoid potential culture clashes.

Key Terms

  • Organic growth: Organic growth is the process of businesses expansion due to increasing overall customer base, increased output per customer, or representative, new sales, or any combination of the above.
  • inorganic growth: Inorganic growth is the rate of growth of business, sales expansion, etc. by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions, and take-overs.

Introduction

Organic growth is the process of business expansion due to increasing overall customer base, increased output per customer or representative, new sales, or any combination of the above, as opposed to mergers and acquisitions, which are examples of inorganic growth. Typically, the organic growth rate also excludes the impact of foreign exchange, and it can be negative.

Growth including foreign exchange, but excluding divestitures and acquisitions, is often referred to as core growth.

Organic growth figures are adjusted for the effects of acquisitions and disposals of businesses. Organic growth does include growth over a period that results from investment in business the company owned at the beginning of the period. What it excludes is the boost to growth from acquisitions, and the decline from sales and closures of whole businesses.

When a company does not disclose organic growth numbers, it is usually possible to estimate them by estimating the numbers for acquisitions made in the period being looked at and in the previous year. It is useful to break down organic sales growth into that coming from market growth and that coming from gains in market share: This makes it easier to see how sustainable growth is.

Creating Organic Growth

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Kuerig: The introduction of the Kuerig coffee maker, which brewed a single cup of coffee at a time, led to tremendous organic growth for it’s creator, Green Mountain Coffee.

A company can take various actions to create organic growth including:

  • Changing the price–more customers tend to buy cheaper products.
  • Advertising and promoting–people are more likely to buy a product if informed, reminded, or persuaded about benefits of product.
  • Producing improved or better products–market research, innovation, new product design (more appealing).
  • Selling in different locations (placement)–more locations increases potential for more customers and more sales.
  • Offering customers preferential credit payment terms–the ability of customers to “buy now and pay later. “
  • Increasing capital expenditure (investment)–new locations, introduction of new production processes/technologies to improve productive efficiency (investment appraisal required).
  • Improving training and development is important especially for sales staff with knowledge (increase customer loyalty and high sales).

Implementing these measures may seem like an easy thing to do. However, there are a large number of companies that used to experience high internal growth that have become examples of low-growth companies. One of the reasons for this result could be the acceptance of a company’s fate as it matures. Instead of implementing these steps to generate internal growth, companies simply accept their “fate” and look for growth opportunities outside of the the company (inorganic growth). In doing so, they could be making a big mistake.

Advantages of Organic Growth

Organic growth gives corporations:

  • Better control and coordination: Firms maintain control whereas external methods lead to loss of control and ownership.
  • Relatively inexpensive: The source comes from retained profits, less risk as the amount of capital involved is relatively lower than external.
  • The ability to maintains corporate culture: No problems related to culture clash that might arise in acquisition environments.

Limitations of Organic Growth

In spite of the advantages of organic growth, when compared to external growth, there are still some limitations associated with relying on this type of growth. They include:

  • Diseconomies of scale: Hierarchical structures may increase communication problems, and there may be slow decision making.
  • Overtrading: If a business grows beyond its means (took too many orders, unable to control costs/manage human resources).
  • Need to restructure: When a firm grows, there is a need to restructure (requires times, effort, money), communications will need to be handled with more care, and there is a need for training/retraining/updating the set of skills for staff.
  • Dilution of control and ownership: If a company grows from partnership to public limited company, the original owners may need to share decision making with new owners ( shareholders ), and there may be prolonged decision-making and conflict of interest between shareholders.
  • Specialist managers will need to be hired as the workforce expands.
  • Delegation of decision-making powers to managers (reducing control of original owners) will take place.

Mergers and Acquisitions (M&As)

M&A refers to the aspect of corporate strategy, corporate finance, and management dealing with the buying and selling of companies.

Learning Objectives

Explain the characteristics of mergers and acquisitions

Key Takeaways

Key Points

  • The terms ” merger and acquisition ” mean slightly different things. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an “acquisition”.
  • A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.
  • Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist: cash, stock, financing options.

Key Terms

  • acquisition: An acquisition is the purchase of one business or company by another company or other business entity.
  • merger: A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.

Mergers and Acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance, and management dealing with the buying and selling of different companies and similar entities that can help an enterprise grow rapidly. M&As are a form of inorganic growth.

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Mergers and Acquisitions (M&A: Mergers and Acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance, and management dealing with the buying and selling of different companies and similar entities that can help an enterprise grow rapidly.

Mergers and Acquisitions have, at times, failed to add as much value as initially imagined by the parties involved. Acquiring a company involves integrating two businesses, which can take time and slow both companies down. When considering a M&A it’s helpful to consider the “Better-Off Test” which goes something like this: Do the business units create and capture more value if they are related than they could as separate, single-business entities without formal ties?

Factors that matter include lower costs–shared activities, shared resources, economies of scale or scope -, and increased willingness to pay.

The Better Off Test in the context of horizontal scope: Can a firm achieve lower average costs or higher average prices by including multiple business units in same firm?

Economies of scope (aka, synergies) make product diversification efficient if they are based on a similar common use. For example, as the number of products promoted is increased, more people can be reached for dollar spent.

Diversify if (cost of having units A & B in same firm) < (cost of unit A in firm A) + (cost of unit B in firm B) – Boost in Willingness To Pay (aka, cross-selling) – Diversify if (WTP of activities A & B if done in same firm) > (WTP of activity A in firm A) + (WTP activity B in firm B)

M&A Trends

Modern trends in M&A largely revolve around the acquisition of up-and-coming firms to enable technological advantage and global competencies for larger firms.

Learning Objectives

Observe the current trends in strategic alliance, primarily those revolving around technology acquisition

Key Takeaways

Key Points

  • Currently, higher technologies and pharmaceuticals are huge influential arenas for modern strategic alliances, most notably acquisition by large organizations.
  • Mergers and acquisitions became prominent in the late 19th century, and have evolved significantly in scale and focus until the modern day.
  • Companies such as Apple, Google, Facebook, IBM, and Microsoft are critical focal points for understanding modern acquisitions, as they have acquired hundreds of organizations for hundreds of billions of dollars.
  • Modern mergers and acquisitions are valuable in providing key competitive advantages in upcoming technological arenas as well as accessing global markets.

Key Terms

  • acquisition: One firm purchasing another organization.
  • Mergers: In this context, merging two separate firms into one collaborative organization.

Mergers and Acquisitions

Mergers and acquisitions (M&A) are a significant aspect of modern strategy, particularly in the technology and pharmaceutical arenas. The reasoning behind M&A’s can vary, ranging from deriving competitive advantages to economies of scale, economies of scope, international expansion, vertical integration, access to unique assets, and perhaps most common today for the acquisition of valuable intellectual property (IP).

Past and Present M&A’s

To understand modern trends in M&A’s, it’s useful to understand the trajectory of this particular strategic alliance approach. Over time, acquisitions have moved through a number of ‘waves’ from a strategy point of view, most recently in order to pursue globalization.

This is a list of M&A reasoning over time, starting with the horizontal mergers in the late 19th century and moving into the globalization movements in the 21st century.

Merger Waves: This is a list of M&A reasoning over time, starting with the horizontal mergers in the late 19th century and moving into the globalization movements in the 21st century.

Modern Trends in M&A’s

Today, the list of recent acquisitions is expanding rapidly. Companies such as Google, Apple, Amazon, Microsoft, and IBM are acquiring new technology companies and platforms rapidly and competitively. The mergers and acquisitions by these five companies alone represents the acquisition of hundreds of business and hundreds of billions of dollars. These moves are an absolutely critical source of competitive advantage from technological, economic, and expansionary perspectives.

Recent High Impact Acquisitions

Let’s look at a few of the largest, most recent acquisitions from some of these influential companies to appreciate the scope and frequency of modern acquisition strategies.

  • Facebook – Facebook acquired WhatsApp in 2014 for $19 billion, propelling Facebook further into the domain of mobile messaging. Shortly after they acquired Oculur VR, a virtual reality technology company. They also acquired Surreal Vision and Pebbles in 2015, both computer vision and augmented reality companies.
  • Microsoft – Since 1987, Wikipedia lists a total of 197 acquisitions for Microsoft. One particularly notable recent acquisition for Microsoft was that of Nokia for a total of $7.2 billion in 2013. Mojang, a video game developer best known for Minecraft, was acquired by Microsoft in 2014 for a total of $2.5 billion. Other notable acquisitions include forays into education software, music discovery, video streaming, big data analytics, data protection, and mobile communications.
  • IBM – IBM is an enormous organization with acquisitions ranging from software storage and management, streaming video, cyber security, salesforce systems, mobile APIs, healthcare, cloud security and capabilities, behavioral marketing, cognitive computing, and an incredibly wide range of other technical abilities.
  • Apple – Apple recently spent $200 million to acquire Turi, a machine learning company. They also demonstrate interest in facial recognition with Emotient, augmented reality with Metaio, music analytics with Semetric, education software with LearnSprout, personal health info collection with Gliimpse, and a variety of other industries and segments.

The race for new technological advantages through acquisition is dynamic, and the definition of the modern trend in strategic alliances is definitely along the lines of technological acquisition.