Maximizing Business Expansion Through External Means
Published by HRCap, Inc. on August 8, 2024
Every organization wants to achieve growth in today's dynamic business landscape. While organic growth is essential, realizing significant gains often requires more time and essential resources. By leveraging inorganic growth strategies, companies can unlock new markets and achieve sustainable business success more swiftly than with organic growth strategies alone.
Inorganic growth refers to increasing a company’s activity and expanding its sales through external means such as mergers and acquisitions, and may provide faster alternatives for businesses looking to accelerate their success and gain access to new opportunities. Compared to organic growth, inorganic growth more swiftly expands the company’s assets by purchasing other businesses or properties in other locations, which contributes to a competitive advantage. Companies may also benefit from the specialized expertise of personnel, already secured market share, and diversification of business models through international expansion. Other financial benefits are the potential increase in credit strength and tax benefits.
Yet, possible drawbacks associated with inorganic growth still exist including the risk of investing in other entities, ventures, and locations that may move in unanticipated directions. While inorganic growth is seemingly a faster process than organic growth, without careful financial and personnel planning, the company risks facing unpredictable growth that it is unprepared to navigate. Hence, inorganic growth comes with various possible positive outcomes and possible downsides, both warranting extensive consideration in terms of long-term outcomes.
3 Essential Inorganic Growth Strategies
The three essential inorganic growth strategies are mergers & acquisitions (M&As), strategic alliances, and joint ventures. With these strategic approaches, organizations can drive growth, diversify operations, and capitalize on synergies that would otherwise be difficult to achieve through organic growth alone.
1. Mergers and Acquisitions
Mergers and Acquisitions (M&As), often used interchangeably, actually describe two distinct processes. A merger occurs when two companies combine to form a new entity, while an acquisition involves a company purchasing another, either in part or whole, leading to consolidation with the parent company. Many businesses opt for M&As to achieve international expansion because it allows them to integrate a foreign entity into their operations for greater reach and entry into new markets. Successful M&As require harmonizing strategies between the parent and acquired companies. These strategies include supply chain optimization, cross-border payment terms, cash visibility, access to liquidity, and bank payment and credit terms.
2. Strategic Alliance
A strategic alliance is another key inorganic growth strategy. This arrangement involves two companies collaborating on a mutually beneficial project while maintaining independence. Strategic alliances can be particularly effective for companies looking to leverage each other’s strengths without needing full integration. These partnerships can range from simple agreements for shared resources to more complex collaborations involving joint marketing or product development efforts. The primary advantage of strategic alliances is that they allow companies to access new capabilities, markets, and technologies while minimizing risk and investment compared to full mergers or acquisitions.
3. Joint Venture
The third inorganic growth strategy is a joint venture, which encompasses a business arrangement in which two or more parties agree to pool their resources to accomplish a specific task, creating a separate entity from each of the participating company’s businesses.
Joint ventures represent a third inorganic growth strategy, where two or more parties create a new, jointly-owned business entity, which is formed by pooling resources from the participating companies to achieve a specific goal. Joint ventures are particularly useful for large-scale projects or market entries where the combined resources and expertise of multiple companies can enhance success chances. Each company in the joint venture shares the risks and rewards associated with the project, making it a balanced approach to pursuing new business opportunities. This strategy is advantageous for ventures requiring substantial capital, diversified skills, and shared responsibilities.
Case Studies: Inorganic Growth in Action
The upcoming case studies illustrate how various businesses have effectively employed inorganic growth strategies. Furthermore, these real-world examples shed light on the potential challenges and setbacks encountered during the implementation of such strategies.
1. Case Study A - Haier Group - Acquisition of GE Appliances
Announced in January 2016 and finalized in June 2016, Qingdao Haier Co., Ltd. (Haier Group) acquired GE Appliances from General Electric Company for $5.4 billion. This acquisition followed the announcement of their long-term strategic partnership, via their Memorandum of Understanding, to collaborate on industrial internet, healthcare and advanced manufacturing on a global scale. Through this acquisition, Haier and GE hoped to bridge their mutual visions, value innovation, and customer service excellence. Haier hoped to grow in the U.S. to strengthen its manufacturing presence internationally and invest further in GE appliances for product diversification. GE also wished to take the opportunity to build its brand presence in China.
In joining together, GE Appliances reports improved company culture and decision-making processes now that they are under Haier Group. These improvements directly impacted GE Appliances’ presence in retail market sales— it held 16.4% of retail sales for large appliances in the U.S. in 2021, which is its highest percentage in the last decade.
Key Takeaway: Acquisition and strategic partnerships can help companies achieve international expansion and technological advancement. When considering strategic partnerships, businesses should consider the importance of aligning with partners that complement their strengths while being cautious of integrating different corporate cultures and managing operational synergies.
2. Case Study C - Amazon - Acquisition of Whole Foods
Announced in August 2017, Amazon acquired Whole Foods Market for $13.7 billion. This acquisition allowed Amazon to expand from its online presence into a brick-and-mortar grocery store. Amazon hoped to expand the products that can be delivered under its Prime Now membership, giving birth to its AmazonFresh service.
The acquisition helped Amazon expand its presence in the grocery market. Although Return On Equity (ROE) and Return On Assets (ROA) both declined marginally from 2016 to 2017, there were dramatic rises after Amazon acquired Whole Foods, climbing to 23.13% and 6.19%, respectively. However, a year after the purchase, a group of Whole Foods staffers emailed thousands of fellow workers with a list of takeover-related grievances, including the removal of some stock options, fewer resources, and less compensation. Some employees made an attempt to unionize under the large Retail, Wholesale and Department Store Union, but their efforts were unsuccessful.
Key Takeway: Making the proper acquisition can help companies diversify their market presence and their service offerings. Amazon’s acquisition of Whole Foods enabled Amazon to compete with other grocery delivery service providers. However, this example also highlights the importance of addressing workforce integration and maintaining employee satisfaction to ensure a smooth transition and sustained success.
3. Case Study B - Starbucks Corporation and Nestle’s Strategic Alliance - Global Coffee Alliance
Announced in May 2018, Nestle and Starbucks entered a strategic alliance under ‘Global Coffee Alliance’ with the core goal of accelerating the global reach of the Starbucks brand through Consumer Packaged Goods and Food Services. To access exclusive rights to market, sell, and distribute Starbucks products in all global at-home and away-from-home channels, Nestle paid $7.15 billion in closing consideration and Starbucks agreed to retain a stake as licensor and supplier of roast and ground to Nestle. Through this alliance, Starbucks gained access to regional markets globally and continued its efforts to meet evolving and localized consumer needs through Nestle's reach and reputation. This created new growth opportunities in its already established North American markets and introduced newer expansion into international markets. On the other hand, Nestle gained exclusive rights to market and distribute Starbucks-branded products internationally in over 80 markets outside of Starbucks’ retail stores, allowing access to Starbucks’ brand and expert sourcing, roasting and internal global brand management.
At present, the Global Coffee Alliance between Starbucks and Nestle remains strong. In 2023, both entities celebrated the five-year mark of their strategic alliance. Starbucks reported that in 2022, the business generated USD 1.6 billion in incremental sales for Nestle, and Nestle reported that its sales of Starbucks reached $3.9 billion in 2022, representing revenue growth through all of its products. In 2023, Nestle reported its total sales grew 1.6% in its second quarter and Starbucks reported record total growth in its third quarter, including sales, profits, and outlet growth because of its strong performance in China, showing success in global expansion.
Key Takeaway: Strategic alliances enable companies to leverage each other’s strengths to achieve business goals. The partnership between Nestle and Starbucks illustrates how alliances can provide access to new markets and enhance product offerings. However, to maximize the partnership's success, companies should ensure clear roles and responsibilities, maintain brand integrity, and continuously adapt to local consumer preferences.
4. Case Study D - Sony Corporation and Ericsson’s Joint Venture - Sony Mobile Communications Inc.
Announced in August 2001, Sony Corporation and Ericsson started a strategic joint venture named Sony Ericsson Mobile Communications Inc. The core goal of the joint venture was to combine Sony’s consumer electronics expertise with Ericsson’s telecommunications technology to create innovative mobile phones that would leverage both companies' strengths.
In its initial years, Sony Ericsson achieved notable success. Though Sony Ericsson made initial profits in 2003, the mobile phone industry rapidly evolved towards smartphones. As a result, Sony Ericsson struggled to keep up with technological advancements and lacked an understanding of their customers, which led them to fall behind their competitors. Recognizing the need for a more unified strategy, Sony Corporation acquired Ericsson’s 50% stake in the joint venture in 2012. This acquisition allowed Sony to fully integrate the mobile phone business into its broader electronics portfolio, rebranding it as Sony Mobile Communications. The move aimed to streamline operations, enhance product integration across Sony’s range of devices, and better compete in the fast-evolving smartphone market.
Key Takeaway: Starting a joint venture can help companies enter inaccessible markets and facilitate innovation. Sony Ericsson’s joint venture demonstrates how the lack of customer research and continual innovation can affect the joint venture's growth efforts.
Conclusion
Inorganic growth strategies present significant opportunities for companies looking to swiftly expand their footprint and securely enhance their market position. M&As, strategic partnerships, and joint ventures allow businesses to access new markets, diversify their product lines, and leverage synergies that drive efficiency and innovation.
However, the path to successful inorganic growth is filled with challenges, such as cultural integration and operational alignment. Organizations must engage in thorough due diligence to navigate such complexities, ensuring potential targets and alliance partners align on strategic goals and build a unified organizational culture. Meticulous planning and clear communication are vital to integrating new entities and realizing anticipated benefits. Companies should also be prepared to address unforeseen HR challenges that may arise with inorganic growth processes.
HRCap offers the HR expertise needed to successfully implement inorganic growth strategies at our client organizations. With a team of seasoned executive recruiters and HR consultants, we provide comprehensive Total HR Solution services, including strategic planning, organizational design, recruitment, and training and development, ensuring that the right talent is identified and remains in place long-term. With our partnership, businesses have achieved rapid expansion, seized new opportunities, and maintained a competitive edge in the dynamic market environment.
Source: HRCap, Indeed, Investopedia, JPMorgan, GE Appliances, GE, WSJ, Starbucks, World Coffee Portal, Atlantis Press, CNBC, Alphastox, InspireIP
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