In our previous post, we talked about why businesses pursue growth, as well as the disadvantages and advantages of expanding. Expansion comes in two forms, internal growth (organic growth) or external growth, which includes M&A, strategic alliances, JVs and franchises. In the exams, you have assess growth strategy and its pros and cons.
Internal vs External Growth Strategies
Internal Growth strategies focus on expanding existing operations, such as increasing production capacity, launching new products, or entering new markets without external partnerships. Though slower, this approach allows businesses to maintain greater control over their operations.
External Growth is a strategy that allows businesses to expand quickly, but it comes with its own set of risks. Unlike internal growth, which relies on a company’s own resources and capabilities, external growth involves partnering with other businesses, either through acquisitions, mergers, or strategic alliances. Let’s break down the key methods of external growth and their benefits and challenges.
Methods of External Growth:
External growth typically occurs through one of the following avenues:
- Mergers and Acquisitions (M&As)
- Takeovers
- Joint Ventures
- Strategic Alliances
- Franchising
These methods allow businesses to leverage the resources and capabilities of other organizations, making expansion faster and potentially more impactful. However, external growth often requires significant external financing and brings a level of risk that internal growth doesn’t carry.
Mergers and Acquisitions (M&As) and Takeovers
Mergers and acquisitions are when two companies combine to form a larger entity, or one company buys another. Mergers typically involve two companies of similar size joining forces, while acquisitions usually happen when a larger company takes over a smaller one—sometimes with the target’s consent and other times in the case of a hostile takeover.
Example of Success:
Disney and Marvel Studios: In 2009, Disney acquired Marvel Studios for $4 billion. This move was a game-changer in the entertainment world. Disney gained access to Marvel’s universe of beloved characters and superhero franchises, which it integrated into its expanding media empire, especially with the creation of the Marvel Cinematic Universe (MCU). This acquisition proved incredibly successful, generating billions in revenue from blockbuster films, merchandise, and streaming content.
Why It Worked:
The acquisition worked because Disney didn’t just buy Marvel; it recognized and leveraged Marvel’s brand strength, storytelling, and fan base. Disney’s expertise in distribution, marketing, and franchise management supercharged the Marvel brand, resulting in movies like Avengers: Endgame, which grossed over $2.7 billion globally.
Example of a Dud:
Yahoo and Tumblr: In 2013, Yahoo acquired Tumblr for around $1.1 billion, hoping to tap into the social media space and the younger demographic. However, the acquisition did not lead to expected growth, as Yahoo struggled to monetize the platform effectively. Tumblr faced a decline in user engagement, and Yahoo never managed to extract meaningful value from the acquisition before it sold Tumblr in 2019 for a fraction of the price.
Why It Didn’t Work:
While Yahoo’s intention was to capture a younger audience, it failed to understand the platform’s culture and audience. Tumblr’s unique user base had a distinct identity that clashed with Yahoo’s corporate structure. Yahoo also failed to innovate or integrate Tumblr effectively into its larger strategy, leaving the acquisition underutilized.
Joint Ventures
A joint venture is when two or more companies come together to pursue a specific project, sharing resources, risks, and rewards. Unlike mergers, both companies maintain their independence and often create a separate business entity for the joint venture.
Example of Success:
Sony and PlayStation (Sony Computer Entertainment): Sony created the PlayStation brand through a joint venture with its electronics division, later evolving it into a powerhouse of gaming. The collaboration between Sony’s hardware expertise and its entertainment content knowledge allowed PlayStation to dominate the gaming market, evolving into one of the most successful gaming consoles of all time.
Why It Worked:
Sony’s PlayStation joint venture worked because the company aligned its gaming and entertainment divisions to create a product that appealed to a broad audience. The innovative use of game technology, excellent marketing, and a strong commitment to the gaming community allowed the PlayStation to evolve into a global cultural phenomenon.
Example of a Dud:
Daimler-Benz and Chrysler: In 1998, the German car manufacturer Daimler-Benz merged with the American company Chrysler, forming DaimlerChrysler. This was intended to create a global car giant that could compete with industry leaders like Toyota and Ford. However, the venture ultimately failed, with Daimler-Benz selling Chrysler in 2007 for a fraction of the original price.
Why It Didn’t Work:
The merger faced major cultural clashes. Daimler, a German company with a focus on engineering and quality, struggled to integrate Chrysler’s American, mass-market culture. Additionally, there were differences in management styles, and the economic environment led to significant financial strain. The two companies’ operations never truly synergized, leading to the split.
Strategic Alliances
A strategic alliance is when two companies collaborate to achieve a common goal but don’t form a new company. Each company retains its independence, sharing knowledge, resources, and sometimes profits.
Example of Success:
Nike and Apple (Nike Training Club): Nike and Apple formed a strategic alliance to combine Nike’s fitness expertise with Apple’s technological prowess, resulting in the Nike Training Club and Nike Run Club apps. This collaboration allowed Nike to tap into the growing digital fitness market, while Apple expanded its ecosystem into health and fitness tracking.
Why It Worked:
The alliance succeeded because both brands brought complementary strengths to the table. Nike provided expertise in fitness, apparel, and sports performance, while Apple contributed with its technology and ecosystem. The result was a seamless integration of Nike’s fitness programs with Apple’s hardware, like the Apple Watch, allowing both companies to offer a more comprehensive experience for their customers.
Example of a Dud:
Microsoft and Nokia: In 2011, Microsoft and Nokia entered a strategic alliance, with Microsoft’s Windows Phone OS becoming Nokia’s exclusive smartphone platform. While the partnership initially seemed like a strong challenge to Apple and Android, the alliance failed as Nokia’s phones struggled with low sales, and Microsoft could not build enough momentum for its mobile operating system.
Why It Didn’t Work:
The partnership didn’t succeed because the Windows Phone OS couldn’t compete with iOS and Android in terms of app ecosystems, developer support, and consumer adoption. Nokia also failed to pivot quickly enough to meet changing consumer demands, and Microsoft’s OS didn’t offer the user experience or app selection needed to succeed in the mobile market.
Franchising
Franchising is a business model where a franchisor sells the rights to use its brand, products, and business model to other businesses (franchisees), who then operate under the franchisor’s guidelines.
Example of Success:
McDonald’s: One of the most recognizable names globally, McDonald’s expanded rapidly through franchising. The company’s model involves selling the rights to open and operate McDonald’s restaurants to franchisees, allowing for fast growth without incurring the costs of owning every single location.
Why It Worked:
McDonald’s success with franchising lies in its ability to maintain consistent quality and brand identity while empowering franchisees to manage their own businesses. The company provided support in the form of operational training, marketing, and global brand recognition. This helped local entrepreneurs set up restaurants with a tried-and-true formula, making it easier for McDonald’s to scale quickly across different markets worldwide.
Example of a Dud:
Cold Stone Creamery: While Cold Stone was initially a hit with its custom-made ice cream and vibrant store experience, the brand struggled with its franchise model. As the company expanded, it faced problems such as high franchisee fees, inconsistent quality control, and an over-saturation of locations. Cold Stone ultimately filed for bankruptcy in 2008 after it couldn’t sustain its rapid growth.
Why It Didn’t Work:
Cold Stone’s franchise model relied heavily on a premium experience that didn’t translate well across all locations. The high cost of entry and ongoing fees placed a significant strain on franchisees, and with too many stores opening too quickly, the company struggled to maintain consistent customer experiences. Over time, the brand’s appeal waned as more competition entered the market, and Cold Stone was unable to adapt its franchise structure to remain profitable.
Risks and Rewards of External Growth
External growth (through M&As, joint ventures, strategic alliances, or franchising) offers companies a chance to expand quickly and achieve greater market share, but it also comes with its own set of risks.
Integration Issues: Cultural clashes and differing business practices can create friction.
Financial Strain: External growth often requires heavy investment, which can lead to debt or financial strain.
Management Complexity: As companies grow rapidly, managing an expanded portfolio can become a logistical nightmare.
But the rewards are clear. If managed well, external growth can lead to rapid expansion, increased market share, and faster scalability—something organic growth can take years to achieve.
Companies may choose these methods to increase market share or enter new geographical areas. For example, Ryanair’s proposed £560 million takeover of Aer Lingus is a strategy aimed at creating a stronger, more competitive airline in Europe. By consolidating resources, Ryanair aims to improve its financial performance and operational efficiency.
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