Business Combinations, business and finance homework help

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Reply to two discussion post: 7-1 Discussion: Business Combinations

Ross, Westerfield, et. al (2015), argued that expansion into a foreign market requires two basic decision to make: (i) which foreign market to enter and (ii) the timing of the entry into the marketplace. The various forms of expansion into new, untapped markets are mergers and acquisition (M & A), joint ventures, licensing, franchising, or contractual, strategic alliances. These options all have advantages and disadvantages associated with each point of entry and have limiting factors that the organization must wrestle.

Expansion into a new market or territory has varying opportunities and risks associated with the project. Any assessment into a new market must marry the long-term views associated with the internal and external factors of the organization and the targeted nation’s potential for growth and profit. Economic and political factors will impact the attractiveness of the project while balancing the benefits, costs, and risks of doing business in the target country. Ultimately, the cost-benefit analysis is more likely to be targeted in countries with stable governments with a free market economy without dramatic inflation or debt.

Timing of the entry into a new market must be considered as part of the analysis for expansion. In some cases, the first to enter the market will have clear advantages over others who enter the market at a later time. However, this is not always the case and the first-move advantages are not always present over the long-term. Examples like Apple who moved into the smartphone business after Blackberry’s stronghold on this sector profited from not replicating the errors of their competitors and offering a new, innovative product.

M & A represent a clean, seamless way to enter a new territory. They are typically quick to execute and can preempt their competitors easily. M & A represent a lower risk as compared to the forms of entry into the marketplace because of the known profit streams and revenue models. Nevertheless, there are disadvantages of M & As that should be considered. A study by McKinsey & Company estimated that 70 percent of M & As failed to achieve expected revenue synergies. In many cases, the entering company will overpay for the acquired company (i.e., Steve Ballmer buying the LA Clippers). Also, acquisitions fail because of a clash of cultures between the acquiring and acquired companies. Lastly, forecasted gains typically take much longer than anticipated for the acquiring company which creates challenges to the company’s bottom line.

Joint ventures establish a firm that is jointly owned by two or more independent firms.

Advantages of joint ventures include sharing costs and risks of opening a foreign market and accumulating local knowledge or political influence. Disadvantages of joint ventures can be the risk of losing control over technology or other intellectual property and a lack of tight management control.

Licensing is an arrangement where a licensor grants a particular right to another entity for a period of time and receives a fee from the licensee. Licensing has a clear advantage in that the licensee does not have to bear the development costs of entering a new market. A disadvantage of licensing includes the risk of losing technological understanding for the licensee and lacks tight control of licensees.

Franchising, while similar to licensing usually involves longer-term commitments. The main advantage of franchising is that the franchisee bears the costs and risks of entry into a foreign market. Disadvantages of franchising include quality control problems of franchisees in remote parts of the country or region.

Contractual, strategic alliances allow an organization to expand into new markets with other companies of similar size and market presence. Delany (2016) states, that these alliances usually provide good solutions to global marketers that lack the required distribution to get into overseas markets. Advantages include sharing of costs among the corporations involved which can reduce the financial risk of entry, instant access into the marketplace, increased sales, gaining new skills and technology, enlarging distribution channels, gaining greater knowledge of new cultures, and enhancing your brand into a new market. Disadvantages of these alliances include the potential for less efficient communication, weaker management involvement, loss of control over product quality, operating costs, employees, etc.

International expansion can be accomplished by many forms of market entry. Assessing the best vehicle to enter a new market will require basic understanding of the objective and goals associated with the desire to broaden the organization’s reach. Unfortunately, there is no one right way to identify the best method for expansion but strategic goals can help an organization determine its most profitable entry point.

References

Ross, S., Westerfield, R., Jaffe, J., Jordan, B. (2013). Finance, Economics, and Decision Making. 1stEdition [Bookshelf Online]. Retrieved from:https://bookshelf.vitalsource.com/#/books/1259824306/cfi/6/20!/4/24@0:7.98

S. A. Christofferson, R. S. McNish, and D. L. Sias, “Where Mergers Go Wrong,” The McKinsey Quarterly 2 (2004), pp. 92–110.

Delaney, L. (2016). Global strategic alliances: Advantages and disadvantages. Retrieved from https://www.thebalance.com/global-strategic-alliances-advantages-and-disadvantages-19535521. 2. The “build or buy” concept is one that assesses how and in which way an organization should look to expand. Each growth strategy presents risks and must be addressed in order to determine whether or not success will be achieved through the selected avenue. In a Forbes Article titled, Organic vs. Inorganic, which way to grow? Author, Brad Kuntz goes on to explain each approach as case by case, there is no one size fits all approach at growing a business. “While small companies tend to favor an internally focused organic approach and large companies usually favor growth by acquisition, both avenues are open to companies of any size. The key is formulating an appropriate strategy, and assembling a strong business case based on the strategy” (Kuntz, 2014).

Organic Growth:

Organic Growth, or growth from within is a method that often times is affiliated with small business, or organizations that may not have enough capital to invest and partner (Kuntz, 2014). When in reality, all businesses, organization and corporations are capable of growing organically. Although any one organic growth initiative may seem small from a corporate perspective, collectively such initiatives are essential to realizing a return on a company’s capital and investment (Favaro, 2012). Businesses that pursue organic growth must be willing and able to dedicate time and resources to properly nurture, assess and gauge progress and course correct if needed. Businesses that grow organically can control their rate of growth, and often face less push-back with communicating their strategy and vision. The risks of organic growth lie in expansion that could potentially outpace the ability to effectively manage. While also stretching resources too thin, straining capital, and or losing focus from the day to day business operations and core mission (Kuntz, 2014).

One way for organizations to encourage organic growth is by fostering a company culture that encourages employees to share ideas and implement strategies and or action items to fuel future growth. Organic growth is not the inevitable result of a successful business model. All companies can become more skilled at growing organically with the business models they already have. But that requires active, engaged corporate leadership (Favaro, 2012).

Inorganic Growth:

Inorganic growth on the other hand is done through mergers, acquisitions and joint ventures. This is utilized when funding and access to capital are radially available and accessible, (Kuntz, 2014). This approach is often said to be a business combination, as essentially the organization is acquiring some or all of what it needs from other organizations (Ross, 2015). This type of growth requires funding from banks, investors and other business and can present significant risk in relation to increased complexities (Ross, 2015).

Looking at this from a Human Resource perspective, these blended business concepts could present additional challenges if company cultures do not align for the better of the organization. In order to effectively reach goals, and present new ideas, leaders must be on the same page and be able to easily communicate the vision and return on investment for each organization affiliated with the business model.

Both build or buy can be effective in the decision making process for an organization and can present great rewards if assessed, communicated and executed for the better of the business.

References:

Kuntz, B. (2014). Organic vs. Inorganic: Which way to Grow? Forbes, (01/14). Retrieved From: https://www.forbes.com/sites/ey/2014/01/14/organic-vs-inorganic-which- way-to-grow/#52aa57142d80

Favaro, K. (2012). Creating an Organic Growth Machine. The Harvard Business Review, (May). Retrieved From: https://hbr.org/2012/05/creating-an-organic-growth- machine

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2015). Finance, Economics and Decision Making. Boston, MA. McGraw-Hill.

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