Organic Growth Issues for the Company - Essay Example

Table of Contents Table of Contents Introduction 3 Organic growth 3 Cross border acquisitions and mergers 4 Advantages of organic growth over cross border acquisitions 5 Disadvantages of organic growth over cross border acquisitions. 6 Factors on which entry mode depends 6 Types of entry modes followed by MNEs 7 Entry mode and MNEs line of business 9 Limitations of inorganic growth 10 Conclusion 13 Reuters, 2009, "Total eyeing M&A but organic growth remains priority", Guardian, [Online], Available at: http://www.guardian.co.uk/business/feedarticle/8509235, [20th May, 2009] 14 Reuters India, 2009, "Stanchart eyes organic growth, not acquisitions", [Online], Available at: http://in.reuters.com/article/businessNews/idINIndia-39380420090502, [20th May, 2009] 14 SBI Life, 2005, About Us, SBI Life Insurance, [Online], Available at: http://www.sbilife.co.in/sbilife/application;JSESSIONID_SBILIFE=KVCGurInC8n9A8zrQeLSegmHbCcoZ68tNgKH7OIiOKHKfOy85lXr!-811724615!168433211!80!443origin=header.jsp&event=bea.portal.framework.internal.refresh&pageid=AboutUs, [20th May, 2009] 14 16 Introduction Growth and profits are very essential for the very basic existence of a company. The three most commonly used measures are either by increase in profits, increase in assets or increase in sales. A company can achieve its growth objectives in two ways: either internally (organically) by the means of increasing its own assets or output through reinvestments or externally (inorganically) by the means of mergers and acquisitions. Now before discussing the advantages and disadvantages of organic growth over cross border acquisitions for multinational companies, one should first understand what is organic growth and what is a cross-border acquisition. Organic growth Organic growth talks about using internal sources of a company for expanding and earning profits. In other words organic growth talks about the expansion of a firm's operations from its own internally generated resources, without resorting to borrowing or acquisition of some other firms. Organic growth represents the real growth of the company. Organic growth represents how well the company has applied its internal resources to increase profits (Reuters, 2009). Increasing output and enhancing sales are some of the methods in which the growth rate of a company can be enhanced. Organic growth sometimes is also referred to as internal growth. Here the company uses funds from one year to expand in the following year. Since organic growth is a slower way of expansion and growth, and many companies wants to grow at an accelerated rate they go in for the inorganic growth. Again a firm can grow inorganically by the means of mergers and acquisitions. Inorganic growth is often seen as a faster way to grow in the business and acquire new markets. Inorganic growth is seen as a major and significant event for the faster growth. Inorganic growth strategies are regarded as important tools to reach into new markets, expand customer base, cut competition, consolidate and grow in size quickly. Cross border acquisitions and mergers Due to globalization, companies have started the ways and means to gain competitive advantage over their competitors. Also the world has seen increased deregulation, privatization and corporate restructuring; globalization has led to cross-border acquisitions and merger activities. Today they are seen as the main mechanism in which a company can expand in foreign markets. The cross border acquisitions and mergers cuts down competition, helps the companies to expand their customer base and grow in size quickly. But there are many barriers to cross-border acquisitions and mergers. Some of them have been discussed below: Legal barriers: cross border acquisitions and mergers are very complex transactions which may involve a number of legal entities. The company may suffer due to lack of information which may also result in deadlock. There may be cases where even after the acquisitions the acquiring company may not get proportionate powers in the process of decision making in the acquired firm. Tax barriers: as cross border acquisitions and mergers are very complex transactions it's very difficult to review the tax impact whereas in the domestic deals these things are very much simpler. Cross border acquisitions can also lead to execution risks. Misuse of supervisory powers is also very common in cross border acquisitions. In cross border acquisitions the acquiring company can also face attitudinal barriers like employee reluctance from the host countries. Advantages of organic growth over cross border acquisitions Organic growth gives more corporate control: since the management knows the value of understanding the customer's need, clear communication is encouraged and specific goals are set to determine progress towards the organic growth. Managers have better knowledge of their own firm's assets so the internal investment is likely to be planned out more efficiently. Organic growths are more private in nature so they are less prone to hostile actions by companies or reluctance of employees. By focusing on the organic growth one can understand the core strengths and weaknesses of the company and also about its cultural identity. So this means they are more likely to know about what changes will be accepted and what traditions can be safely tucked along. Organic growth helps the employees and employers to understand how their work is contributing to the overall growth of the company. So it creates a sense of ownership among them. Organic growth emphasizes upon focusing on the existing customers so as to attain customer loyalty. Organic growth again emphasizes upon the importance of innovations in the long run (Reuters India, 2009). Disadvantages of organic growth over cross border acquisitions. Organic growth does not work well in mature markets as there the need arises of constant cost control. Where everyone is keenly watching onto the ways to maximize profits. The dilemma of short term and long term goals is very prominent in organic growth. For example, innovations can only drive results in the long run but if one is thinking in terms of short term benefits then it can only result in the decrease of a large share of profits. Organic life cycle can only be used if the product life cycles are long enough. Factors on which entry mode depends The various factors which determine the entry mode are given as follows: Entry modes can depend upon the stage of development a firm is in. Entry modes can also depend upon the transactions cost. Entry mode also depends upon the organizations capacity. Entry modes can also be dependent on the firm's startegic objectives. Entry modes can also depend upon the scope in the emerging markets. Entry modes may also depend upon the industry barriers Entry modes can also depend upon the firm's experience in the foreign market. Entry modes also depend upon the host country's micro and macro environmental factors. Entry modes can also depend upon the size of the market. Entry modes can also depend upon the foreign exchange rate and host country's currency. Types of entry modes followed by MNEs The various types of entry modes which are being followed by MNEs are: Through licensing. Through joint venture. Through foreign direct investments and Through expanding (Luo Y,1999). The various modes of entry have been discussed below in details: Through licensing: Here the MNE's permits the home country to use its trademark, brand name and technical knowhow for manufacturing and marketing purposes in the domestic markets. Here the license is given on the basis of fees to the MNE's and it acts as a source of income for them. Here the properties of the MNE's are trademark, brand name and technical knowhow and they are intangible in nature. For example, ITC a leading conglomerate in India is the licensee of BAT (British American Tobacco) company. BAT has give ITC a license to use its brand name another example can be that of PEPSI which not only provides the brand name but also the essence. Yet another example that can be cited in this context is that of DISNEY, which entered the Japanese market through licensing (Poeter P. E., 1998). Joint venture: Here an entity is formed by two or more parties in order to undertake economic activities together either in host country, or in home country or it can also be a third country. Here the parties pledge to share their risks and share their profits. Now, these kinds of ventures can also be done for a single specific project. For example: SBI Life which is a joint venture between the State Bank Of India and BNP Paribas Assurance (SBI Life, 2005). Through foreign direct investments: Here a company from one country makes an investment in the establishments of an enterprise of another country. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired assets and it requires business relationships between the participating countries. For example, if the economy of a country is closed that is, it does not entertain free trading by foreigners then there is no scope of foreign investments. Exporting: Many a times the domestic markets provide limited opportunities and in order to increase profits and expand, many businesses look into overseas for new markets of their products. The products may include goods, services or intellectual properties. It's a traditional and well established method of reaching new markets. For example, Metro Tyres is the largest exporter of bicycle tyres and tubes from India (Metro Group, 2008) Entry mode and MNEs line of business Licensing: Starting the business in a new country, any enterprise or an organisation needs to overcome a great amount of complexities and barriers. One needs to handle and control every aspect of the process, right from creating a working prototype to the monitoring of manufacturing process to devising plans for sales and distribution. Whereas in the case of licensing most of these steps are taken in care by the licensee and the royalties are paid to the licensor. Licensing also minimizes the risks. So if the product type is intangible then the MNEs can go in for licensing Joint venture: Joint venture compliments the capabilities, capacities and resources of the combining companies. If MNEs wants to enter into the new markets they will have to take help from some other companies in doing so. Joint ventures are designed to help in business growth and have synergistic effect in the course of doing so. Joint ventures are done to gain competitive advantage without sacrificing on the work already done by them. For example, Yahoo7, is a joint venture between the search engine Yahoo and Channel 7 in Australia (ZD Net Australia, 2006). Foreign direct investments: As FDI plays an important role in the growth of global business. It can provide the investing firm with new market and also at the same time provide finances to the host country or firm which receives the investments, all of these ultimately results in the economic development of the particular country or firm. FDIs are done to acquire long term interest in foreign market and also to have the power to control their management. Exporting: Exporting helps the company to discover new and untapped markets globally. It is done when the local markets are exhausted by the products or if the level of competitions in the local market is very high. Exporting also occurs when the competition in the other countries is less or if the products of a company is extremely popular in a particular country or may take place when the company wants to grow organically. For example ITC is the India's second largest exporter of agricultural products (ITC Ltd, 2007) Limitations of inorganic growth Today the environment of the business is changing very rapidly. So it is not sufficient for the company just to survive the competition but they should also try to edge out competitors and continuously innovate so as to increase their market share. Though inorganic growth strategies are adhered to as very important for the companies to enter new untapped market or markets where there is growth potential. But even these markets have certain limitations. Some of the limitations of inorganic growth are mentioned below: Many a time, mergers and acquisitions do not help in gaining more out of the deals. In other words, a deal may look good on paper, but when it is actually applied it fails miserably. In fact, in some cases mergers and acquisitions can also destroy the product value or the an organisation's reputation, instead. For example, eBay and "stumble upon acquisitions". In May 2007, eBay thought that its acquisitions over Stumble Upon will result in rich dividends and profits in the long run and which it never happened (McCarthy C,2009). When two or more companies join together for trade purposes, they actually have very little time to judge about the competitive advantage in doing so. But for a business to be successful in the long run it is very important to go through the process slowly and more cautiously. And moving fast can create blunders and can be very harmful for the alliances. The inorganic mergers can also run into problems if the goals of the combining parties are not the same. In some cases sharing of information can also be a problem area. There are times when the alliances between the parties are done only in a particular country and they are competitors in rest of the world. So giving too much of information to the partners will help them in becoming more powerful as competitors. A classic example of this case is that of a joint venture which was created between General Motors and Shanghai Automotive Industry Corporations. As, General Motors wanted to enter into the lucrative Chinese market. Now, here a part of the agreement that required the sharing of technology with Shanghai Automotive Industry Corporations as mandated by the Government of China. It worked out quite well for some time but then Shanghai Automotive Industry Corporations started making its own cars and thus became competitors of General Motors. They still are partners in the Chinese markets (Shanghai GM, no date). Conclusion Every company wants soaring profits and growth. And profits and growth are not accidental. And the best way for the growth of the company is organic growth because fast growth can even risk the life of the business concerned. Growth is not just about acquisitions of new customers but also retention of the older ones and this aspect of growth just take care of that. Shaping the growth curve of a company is a long time process. And for growing in the long run an organisation requires clear and concise directions which are only possible if the company follows the organic growth structure. References: ITC Ltd, 2007, Top Indian Companies, [online], Available at: http://www.iloveindia.com/economy-of-india/top-50-companies/itc.html, [20th May, 2009] Luo Y,1999, Entry and cooperative strategies in international business expansion, Published by Greenwood Publishing Group. McCarthy C, 2009, "Anchors aweigh: eBay casts off StumbleUpon", the social, [online], Available at: http://news.cnet.com/8301-13577_3-10218418-36.html, [20th May, 2009] Metro Group, 2008, Metro Group Today, About Us, [Online], Available at: http://www.metrogroup.co.in/aboutus.aspheadinfo=aboutus, [20th May, 2009] Poeter P. E., 1998, Usage and Distribution License Agreement, Colorado School of Mines, [online], Available at: http://inside.mines.edu/epoeter/583/583license.html, [20th May, 2009] Reuters, 2009, "Total eyeing M&A but organic growth remains priority", Guardian, [Online], Available at: http://www.guardian.co.uk/business/feedarticle/8509235, [20th May, 2009] Reuters India, 2009, "Stanchart eyes organic growth, not acquisitions", [Online], Available at: http://in.reuters.com/article/businessNews/idINIndia-39380420090502, [20th May, 2009] SBI Life, 2005, About Us, SBI Life Insurance, [Online], Available at: http://www.sbilife.co.in/sbilife/application;JSESSIONID_SBILIFE=KVCGurInC8n9A8zrQeLSegmHbCcoZ68tNgKH7OIiOKHKfOy85lXr!-811724615!168433211!80!443origin=header.jsp&event=bea.portal.framework.internal.refresh&pageid=AboutUs, [20th May, 2009] Shanghai GM, no date, "Shanghai GM Taps Compuware Covisint To Connect To Suppliers" MCADCafe, [online], Available at: http://www10.mcadcafe.com/nbc/articles/view_article.phparticleid=295790, [20th May, 2009] ZD Net Australia, 2006, "Yahoo7 takes aim at ninemsn", [online], Available at: http://www.zdnet.com.au/news/software/soa/Yahoo7-takes-aim-at-ninemsn/0,130061733,139235557,00.htmomnRef=1337 [20th May, 2009] Read More