Advantages and Disadvantages of Glaxo Smith Kliens Growth Strategies - Case Study Example

Growth Strategies Introduction Growth strategies can be defined as the means through which a company intends to realise its goals to grow. Growth is the goal of all businesses since it provides potential for stronger market position and higher revenue. As the revenue of a company grows, the value of the company also increases. Internal or organic development, mergers and acquisitions are some of the viable growth strategies used by some companies in order to realise growth. Internal or organic growth strategy can be defined as growth technique that facilitates the growth of a company through larger sales volume and increased output. This growth strategy is built on four main pillars namely; public relations, revenue, quality and employee relations. On the other hand, Mergers and acquisitions involve buying and combining of different companies or similar entities in order facilitate the rapid growth of a company (Slowinski 2005). In the United Kingdom, pharmaceutical companies in the likes of Glaxo Smith Klien and Astra Zeneca employ different growth strategies. Glaxo Smith Klien, a large drugs business company employs an organic growth strategy by reorganising its research and development operations in order to improve expansion and facilitate growth (GSK 2011). Conversely, Astra Zeneca uses merger and acquisition as a growth strategy, the firm carries out takeover for bioscience (AstraZeneca 2006; AstraZeneca 2007). This paper will compare and contrast these growth strategies by discussing their advantages and disadvantages. Relevant examples will be used to show the similarities, differences, advantages and disadvantages of these growth strategies. Foremost, this paper will provide a brief overview of these growth strategies and outline their advantages and disadvantages. Secondly, it will compare and contrast these strategies. In addition, this paper will examine some of the firms that employ internal or organic development and mergers and acquisitions as growth strategies and how these firms have benefited or incurred loses by using these strategies. Internal or organic growth strategy Internal or organic growth strategy is a growth technique that focuses on facilitating the growth of a company by enhancing the internal aspects of the company. Organic growth is in most cases realised through operational efficiencies, new products and more customers (Hess, 2006). A good number of organizations employ organic growth at some stage of their development. This strategy necessitates the expansion of business and increase of turnover through similar business processes rather through acquisitions or a shift in market base. A business using an organic growth strategy may shift or move into a new geographic area or market or use new sales channel, however the business still retains its original model. Using this strategy growth is not realised through outside investment instead the growth rate of a business occurs naturally thus the name organic (Hess, 2006). Advantages Organic growth is usually safer than other growth strategies realised through mergers and acquisitions or other rapid growth strategies. This is mainly because this is a tried and tested business strategy. This strategy provides an opportunity to test the business model before using another model. Organic growth is usually considered as the most preferable method of expanding a business since it involves the use of, an existing business and then enhancing it further. Typically, the market rewards an organic growth strategy. This strategy is usually less expensive, therefore if a company is expanding organically and profitably, the market will inevitably continue to rely on the trends and the values of that particular company in future (McHenry & Silva, 2010).Growing companies in a publicly traded arena often have a higher P/E ratio mainly because of the anticipated growth in profits and revenue. Moreover, an organic growth strategy helps to enhance innovation. A slower growth can contribute to creativity. This strategy is also harmonious in nature and does not lead to a clash of strategy or culture since it is gradual, stable and well-calculated. Furthermore, an organic growth strategy facilitates the diversification of client base. Clients are more bound to build around services and products provided by organically growing businesses due to the fact these businesses often invest and focus on new products that could meet the needs of a different market base. Generally, organic growth provides an opportunity for growth and development not only in terms of revenue or profits but also in terms of the company’s capacity and employee potential. For instance, in the course of an organic growth, typically employees have a right to apply for new advancement opportunities due to the company’s expansion. In addition to this, as compared to other growth strategies such as mergers and acquisition, organic growth usually requires less debt and provides less stress to a company mainly because it is cheap and gradual (McHenry & Silva, 2010). Disadvantages As compared to other aggressive growth strategies like mergers and acquisitions, organic growth is slower and takes a longer time. Therefore, for businesses seeking to expand rapidly, this strategy can be limiting. As a result most businesses prefer to use outside investment in order to realise rapid growth. Furthermore, due to the slow speed associated with an organic growth strategy, a company that solely employ this strategy stands a chance of being outflanked by its competitors who use other rapid growth strategies such as mergers and acquisitions. Moreover, companies that use an organic growth strategy face the risks of human capital attrition or demoralisation. There can be attrition if a business is growing more slowly than the developing human capital (McHenry & Silva 2010; Hess 2006). Organically growing companies can be vulnerable to stagnation. Companies that use this strategy are often bound to focus and spend more time appraising their internal structures and defending their business rather than focusing on the expansion of their businesses. This may in turn contribute to the stagnation of the company or business. Additionally, organically growing companies face the risk of fewer capitalisations due to slow growth. Companies that experience slower growth less likely attract or get additional investments (McHenry & Silva 2010; Hess 2006). Case study: Organically growing companies Glaxo Smith Klien (GSK) is a good example of a UK based pharmaceutical company that employs an organic growth strategy. Initially, the company was formed through a merger between SmithKline Beecham and Glaxo SmithKline. Following this merger, the company has grown organically by enhancing its operational efficiencies and introducing new products among many other strategies. To date, the company is one of the largest pharmaceutical company in the world. Since the merger of the company in the year 2000, the company has used an organic growth strategy by reorganising its research and development operations in order to improve expansion and facilitate growth (Huckman & Strick 2005; GSK 2011). For example, the company focuses on the discovery and development of new vaccines and medicines. The success of the company is mainly dependent on innovativeness and productivity particularly with regards to the discovery and development of new pharmaceutical products. Furthermore, GSK focuses on extensive research and the enhancement of its internal operational efficiencies in order discover and develop new pharmaceutical products. Over the years, the company has sought to enhance its research and operational efficiencies by collaborating with academic institutions and biotechnology companies in order to develop transformative products and scientific concepts (GSK 2011). As a result of using an organic growth strategy, the company has over time managed to become a global leader in the pharmaceutical industry. Currently, based on its revenue, the company is considered to be the third largest pharmaceutical company in the world after Johnson & Johnson and Pfizer (CNN 2009). According to its annual report in 2007, the company realised sales of over £22 billion and over £7 billion in profits. The company has over 90, 000 employees and is known to pioneer the development of new pharmaceutical products that have helped in the eradication of diseases. Some of the pharmaceutical products associated with Glaxo Smith Klien include; Amoxil, Boniva, Lovaza, Valtrex, Ribena, Horlicks and Sensodyne among many others (GSK 2007). The growth of the British Sky Broadcasting Group plc (BSkyB) in the United Kingdom is a good example of companies or businesses can grow or develop their businesses using an internal or organic growth strategy rather than relying on rapid and expensive growth strategies such as mergers and acquisitions. A case study of British Sky Broadcasting growth provides solid evidence that an organic growth strategy can be effective in realising optimum and sustainable growth (Riley 2011). BSkyB is a UK based satellite broadcasting, telephony and broadband services company. The company was founded in 1990 through a merger between British Satellite Broadcasting and Sky Television and has since actualised tremendous growth and success. Currently, the company is the largest pay-TV broadcaster in the United Kingdom with over 10million subscribers. Much of the company’s success can be attributed to the company’s growth strategy (Gershon 1996). Initially, the company had set for itself a target of 10 million household subscribers in the United Kingdom. This seemed to an overly ambitious corporate target however the company managed to realise this target earlier than it has expected (Clover 2010). As a result, the company has been able to realise a consistent growth in profits and revenues regardless of the recent economic downturn (Riley 2011). The organic growth experienced by the company extends beyond adding new subscribers. Instead the company has managed to increase the average amount that subscribing households spend on its services. The company has managed to realise this by using effective marketing strategies to persuade a good number of Pay-TV subscribers to purchase internet broadband from BSkyB and upgrade in order to subscribe to HD and 3D. Through this growth strategy the company has managed to gain a high customer loyalty. The company’s customer’s loyalty to its products and brand has over time been improved thus resulting to a lower percentage of subscribers ending their subscription each year (Riley 2011). The organic growth strategy used by the company has mainly been focused on two main aspects. Foremost, the company has focuses on market penetration by increasing its share particularly with regards to television subscription. Secondly, the company focuses of product development. The company is renowned for introducing to the market new innovations that contribute to enhanced Sky HD services. Evidently, the results realised by the British Sky Broadcasting Group due its organic growth strategy epitomize a business venture that has managed to maintain sustainable growth despite of the challenging nature of the external environment characterized by a financial turn over. It is therefore apparent that an organic growth strategy can help a company to realise optimum and sustainable growth (Riley 2011). Mergers and Acquisitions Mergers and acquisitions (M & A) have become increasingly popular strategy used by companies to achieve corporate growth and diversification. According to Schuler and Jackson (2001), M&A represents the extreme end in the continuum of options that companies have in combining with each other with licensing at the least complex or intense end and M&A at the other. Mergers and acquisitions occur when two or more companies or organizations join together part or all of their operations in an effort to strengthen and maintain their position in the marketplace or to expand into new markets and acquire new technologies. Coyle (2000) distinguishes between the two operative terms in M&A- mergers and acquisitions. The distinction is based on factors such as the relative size of the two organizations, ownership, control and management of the combined business as a result of the merger or acquisition. A merger usually refers to the takeover of one company by another when the businesses of each company are consolidated as one. Typically, mergers occur when two companies of roughly similar size or capability pool their resources together to establish a new business or company where both companies participate in establishing the management of the new business (Coyle 2001). The typical power distribution in a merger is more of a collaborative partnership with neither company being sufficiently larger than the other so as to dominate the resulting business in terms of management or control and the stakeholders and top management of both companies still hold their positions post merger. However, this does not mean that mergers do not occur between unequals (Schuler and Jackson 2001). Some of the best illustrations frequently given for mergers are that between UK pharmaceuticals Glaxo Wellcome and Smithkline Beechams to form Glaxo Smithkline in 2001, between British pharmaceutical Zeneca Group and Swedish Astra A.B. to form Astra Zeneca in 1998 between oil giants Exxon Corp. and Mobil Corp. to form Exxon Mobil in 2000, between America Online (AOL) and Time Warner to form AOL Time Warner in 2006, between Citycorp and Travellers Group to form Citigroup in 1999 and between unequals such as JP Morgan and Chase to form JP Morgan Chase (Visualeconomics.com 2011) . Glaxo Smithkline- which is discussed earlier in this paper under organic growth strategy- is the world’s third largest pharmaceutical company and the largest in the UK while the Exxon Mobil merger is the biggest in the energy industry. On the other hand, acquisition (or takeover) is the takeover of ownership and management control of one organization, company or business by another which is typically larger and more dominant (Coyle 2001). Acquisitions refer to cases where one company acquires controlling interest in another company’s stock or the business and assets of another. The business created by an acquisition is usually controlled by the acquiring company and the stakeholders in the acquired company usually exchange their stocks for those of the new company to become minority shareholders (Coyle 2001). Acquisitions could be partial- where the acquiring company obtains controlling interest in another company, or full where the acquiring company buys the entire stock of another. Acquisititon may also be categorized into two major types- acquisition and integration and those involving acquisition and separation of the new businesses. Acquisitions are a popular growth strategy in the high tech and pharmaceutical sectors (Schuker and Jackson 2001). For example, AstraZeneca UK has carried out takeovers of bioscience firms such as Cambridge Antibody Technology Group plc in 2006 and a biologics manufacturing facility in Montreal, Canada, from DSM Biologics Inc. There are various reasons or motivations for M&A as a growth strategy. Schuler and Jackson (2001) catalogue some of the most frequent reasons such as using horizontal mergers to create economies of scale and market dominance, acquisition of competitors to eliminate competition merging with a view to spreading risks and cutting costs, bigger asset base to leverage borrowing and most significantly, to acquire talent, knowledge and new technologies in the fast changing and ultra-competitive contemporary global marketplace (Schuler and Jackson 2001, McHenry and Silva 2010). M&A are also preferred to tactics such as organic growth in seeking market expansion due to their high speed of entry into a new market as takeovers are much faster and less costly. M&A could also help a company increase its products and services offerings effectively within a short time frame. Advantages of M&A as Growth Strategy Speed One of the most frequently cited advantages of M&A as a growth and expansion strategy is the advantage of speed. Mergers and acquisitions present companies in highly competitive or highly volatile industries such as pharmaceuticals or information technologies with the opportunity for rapid expansion which could be critical to the companies’ survival and profitability (Cowell 1998). For companies in industries such as pharmaceuticals and biotechnology where profitability is driven by factors such as economies of scale in research and development and the ability to patent products and technologies, M&A is preferred to organic growth and investment in research and development since it is faster and could enable smaller companies to compete and survive with larger and well established industry players (Cowell 1998). For Astra and Zeneca, merging and the subsequent acquisitions as AstraZeneca have enabled it keep pace with larger and more established competitors such as Pfizer and Glaxo Smithkline . Economies of Scale Closely linked with speed is the advantage of economies of scale. M&A as a growth strategy enables companies in competitive and fast changing industries to achieve economies of scale in research and design as compared to organic growth strategies (McHenry and Silva 2010). Achievement of economies of scale goes hand in hand with cost efficiency as another advantage of M&A. The merger between Astra and Zenica in 1998 had been viewed not only as inevitable but economically sensible due to the escalating cost of research in the European pharmaceutical industry in the 1990s and the expiry of drug patents which implied that companies had to come up with newer innovations (Cowell 1998). The merger between Exxon and Mobil also created one of the world’s largest oil companies and opened up the markets of the two companies to the new combined business. Cost Efficiency M&A are also considered as cost effective growth strategies due to their cost efficiency in expansion. As indicated above, M&A enables companies in highly competitive industries to cushion themselves from the escalating costs of research and development in biotechnology implied in organic growth strategy . Strategic alliances are necessary in such industries to better manage research and development and marketing costs. The merger between Citicorp and Travelers Group to form Citigroup was also cost effective for the resulting business as it did not have to incur additional capital costs in establishing new branches as would have been required by organic growth. Acquisition of New Talent, Products, Knowledge and New Technologies This is the most significant advantage of M&A according to Schuler and Jackson (2001). M&A enable companies to acquire new skills, technologies and products from other companies which are instrumental as a growth strategy and could propel the resulting business to a position of market dominance. They offer a quick and inexpensive method of acquiring new technologies and vital human resource skills which are drivers of competitive advantage (Kalb 2006). For instance, AstraZenica’s acquisition of Cambridge Antibody Technologies, once considered the jewel in the crown of the British biotech industry, diversified the company’s portfolio and product offerings from chemical pharmaceuticals to biological drugs (AstraZeneca 2011, King et al 2002, Pollack 2006). Its acquisition of facilities such as the biologics manufacturing facility from DSM biologics in Montreal also provided a cost effective platform for expansion of its biological drugs product line (Pollack 2006). Disadvantages of M&A as a Growth Strategy There are several disadvantages or limitations of pursuing an M&A led growth strategy. These mainly relate to the various risks and post merger or post acquisition integration complexities. Risks M&A by their very nature imply an undertaking of risk by the two merging companies or by the acquiring company. There is a higher degree of financial risk in M&A as opposed to organic growth since the acquired business or new company may not perform as well as expected (Hamilton 2008). In addition, a merger or acquisition typically involves adoption and bearing of any actual or potential risks, liabilities and contingencies. For example, AstraZeteca’s acquisition of MedImmune is often cited as a case in point demonstration of the pitfalls of M&A led growth. The main products acquired from MedImmune at more than $15 billion did not sell as well as had been anticipated (Hamilton 2008). The merger between AOL and Time Warner has also been unanimously considered as a management failure and a catastrophe, nay disaster, as the dot com bubble burst, new technologies sprouted to supplant AOL and the share price of the new company plummeted (Dumon 2008). The failure of the AOL Time Warner merger is a vivid illustration of the risk involved in M&A especially if due diligence is not accurate. As Schuler and Jackson (2001) illustrate, unrealistic expectations coupled with risks are primarily responsible for the failure of mergers. Post M&A Integration Another limitation related to M&A as a growth strategy as that integration or merging of the two businesses or of the acquired business into the main business may be extremely difficult. As Schuler and Jackson (2001) and McHenry and Silva (2010) argues, post merger integration needs to be carefully managed or it could lead to disruptions due to issues such as cultural conflict (and implied cultural incompatibility) and the loss of talent due to turf wars and hidden costs of management and integration (Coyle 2000). The failure of the AOL Time Warner merger has frequently been attributed to the pain of change due to the different systems and processes in the two companies as AOL was still stuck on dial up internet while Time Warner had broadband technology. Failure to manage this change is responsible for the record losses suffered by the venture (Dumon 2008). This is especially true if the M&As are cross cultural in nature and require merging or acquisition of businesses from different cultural settings and contexts. Cultural conflict or turf wars to protect territories among managers and employees from the merging parties are the most common causes of the failure of mergers and acquisitions as a growth strategy as they have the potential to stagnate a company’s growth (Strategies for Managing Change 2011: Dumon 2008). Mergers such as that between Sprint and Nextel Communications failed due to resignation of managers who cited cultural incompatibility (Dumon 2008). Therefore, cultural clashes undermine M&A as post integration plans are sabotaged at the expense of turf wars. In addition, M&A usually involve layoffs which may spark protective attitudes among employees at the risk of company synergy which is usually difficult to achieve in mergers (Schuler and Jackson 2001). Conclusion Basically, this paper has compared, contrasted and discussed the advantages and disadvantages of internal or organic growth strategy and mergers and acquisition growth strategy. From this paper, it is established that organic growth strategy is a growth technique that focuses on facilitating the growth of a company by enhancing the internal aspects of the company. Organic growth is in most cases realised through operational efficiencies, new products and more customers (Hess, 2006). On the other hand, mergers and acquisition is a growth strategy that occurs when two or more companies or organizations join together part or all of their operations in an effort to strengthen and maintain their position in the marketplace or to expand into new markets and acquire new technologies. According to the findings of this paper it is evident that some of the benefits associated with organic growth include the fact that this strategy is safe, less expensive, promotes innovation and enhances the capacity or opportunities available in a company. On the other hand, some of the benefits associated with merger and acquisition include the fact that this strategy promotes fast growth, it is cost efficient and leads to the acquisition of talent, knowledge and new technology. Conversely, some of the disadvantages associated with organic growth include the fact that this strategy is slow and can lead to stagnation and low capitalization (McHenry & Silva 2010; Hess 2006). Some of the disadvantages associated with merger and acquisition include the fact that this strategy is risky and can be expensive. Nonetheless, based on the companies used as examples in this paper, it is evident that despite of their limitations these growth strategies can promote the success and growth of a company. Bibliography AstraZeneca, 2006, AstraZeneca UK Limited Completes Acquisition of Cambridge Antibody Technology Group plc Compulsory Acquisition Procedure Completed Subsequent Offer Period Closed. 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