External growth strategies

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1. External Growth Strategies Presented by Muhammad Shahmeer

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. 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.

4.  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.

5. 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.

6. 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

7. 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

8. 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

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