1.6 Growth and evolution
The concepts of change, culture and globalization are central to any business strategy that involves growth in overseas markets. International trade and operations can cause major problems including adjusting to foreign languages, customs and cultures. There could also be a need to modify business practices to suit local laws and regulations. This Unit has looked at the various business strategies that firms often use to achieve growth. These strategies can be remembered by the mnemonic FUBED: • First-mover advantage This is the strategy of being the first in a market. This allows the business to establish market share, a good reputation and a loyal customer base before other firms have a chance to launch their products. • Unique selling point (USP) Offering products that have a USP makes a product stand out from other products that are available on the market. • Branding A well-established and recognised brand provides huge opportunities for business growth in local and international markets. • Economies of scale These enable a business to benefit from lower unit costs of production by operating on a larger scale. Lower average costs help to give the firm a price advantage. • Diversification This strategy involves the business selling new products in new markets to spread its risks (see Ansoff ’s Matrix, Unit 1.3). It enables the firm to gain revenue from an untapped market (as it is new to the industry), despite being a potentially high risk strategy. M&As are common in today’s fast-paced, highly competitive and continually changing business environment. Organizations are increasingly having to ‘run faster to stay still’, i.e. they have to grow and evolve in order to maintain their market share and competitiveness. As a strategy, M&As enable businesses to retain or enhance their competitiveness. The increasing number
However, growth strategies do not always work, e.g. not all M&As are successful due to resistance to change and cultural clashes. In these cases, a demerger might take place. This happens when a company sells off a significant part of its business. In 2007, for example, IBM sold a large proportion of its investment in Lenovo, China’s largest computer manufacturer (which acquired IBM’s personal computing division in 2005). Global car manufacturer DaimlerChrysler (which merged in 1998) also demerged in 2007. Cadbury Schweppes (which merged in 1969) split in 2008. Firms might strategically choose to demerge in order to: • Sell unprofitable sections of the business • Avoid rising unit costs and inefficiency by being too large (diseconomies of scale) • Raise cash to sustain operations in other parts of the business • Have a clearer focus by concentrating their efforts on a smaller range of business operations. • For some businesses, growth and downsizing occur on a cyclical basis. Reductions in the size of a business create their own problems that need careful change management. For example, there is likely to be a reduction in staffing so redundancies have to be planned and managed (see Unit 2.1). The costs of redundancies could be quite considerable and cause short-term liquidity problems for the business (see Unit 3.7). An alternative strategy to a complete merger or takeover of a target business is to buy one of its brands. This strategy is known as brand acquisition. For example, BMW bought the Rolls Royce brand in 2003 to enhance its product portfolio. This is a relatively cheaper and lower risk growth strategy. Similarly, firms may decide to sell one of their brands if they are facing a liquidity problem, rather than be taken over by a third-party company.
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CORE
Growth is a strategic aim for many businesses. In an everglobalized business world, the driving force behind growth and evolution is not simply profit, but sustainable competitiveness – as the Chinese proverb goes “Be not afraid of going slowly; be afraid only of standing still.”
of people and organizations actively involved in stock markets, fuelled by the globalization of markets, has made M&As more attractive. Deregulation has also enabled M&As to take place more efficiently.
Business Organization and Environment
Growth and evolution and the CUEGIS concepts