Chapter 14: Strategies for Firm Growth
CHAPTER 14
STRATEGIES FOR FIRM GROWTH
LEARNING OBJECTIVES
1.
Identify and discuss the core internal growth strategy for entrepreneurial firms.
2.
Describe additional internal product-growth strategies entrepreneurial firms can
use.
3.
Examine international expansion as a growth strategy.
4.
Discuss different types of external growth strategies.
CHAPTER OVERVIEW
This chapter focuses on the growth strategies that are available to entrepreneurial firms.
The strategies are divided into internal growth strategies and external growth strategies.
The internal growth strategies include new product development, other product-related
strategies, and international expansion. The external growth strategies include mergers
and acquisitions, licensing, strategic alliances and joint ventures, and franchising (which
is discussed separately in Chapter 15).
Detailed tables are provided that explain the advantages and disadvantages of both
internal and external growth strategies. A special emphasis is placed on the notion that a
firm should be well informed regarding the specific challenges involved with the growth
strategy or strategies it pursues.
CHAPTER OUTLINE
I. Internal Growth Strategies
A. New Product Development
II Additional Internal Product-Growth Strategies
A. Improving an Existing Product or Service
B. Increasing the Market Penetration of an Existing Product or Service
C. Extending Product Lines
D. Geographic Expansion
III. International Expansion
A. Assessing a Firm’s Suitability for Growth through International Markets
B. Foreign Market Entry Strategies
C. Selling Overseas
IV. External Growth Strategies
A. Mergers and Acquisitions
1. Finding an Appropriate Acquisition Candidate
2. Steps Involved in an Acquisition
B. Licensing
289
1. Technology Licensing
2. Merchandise and Character Licensing
C. Strategic Alliances and Joint Ventures
1. Strategic Alliances
2. Joint Ventures
CHAPTER NOTES
I. Internal Growth Strategies
• Internal growth strategies rely on efforts generated within the firm itself, such as
new product development, other product-related strategies, and international
expansion.
• The distinctive attribute of internally generated growth is that a business relies on
its own competencies, expertise, business practices, and employees.
o Internally generated growth is often called organic growth because it does
not rely on outside intervention.
A. New Product Development
1. New product development involves the creation and sale of new products (or
services) as a means of increasing firm revenues.
2. In many fast-paced industries, new product development is a competitive
3. The keys to effective new product and service development, which are
consistent with the material on opportunity recognition and feasibility analysis
in Chapters 2 and 3, follow:
a. Find a need and fill it
b. Develop products that add value
c. Get quality right and pricing right
d. Focus on a specific target market
e. Conduct ongoing feasibility analysis
II. Additional Internal Product-Growth Strategies
A. Improving an Existing Product or Service. Often a business can increase its
revenue by improving an existing product or service—enhancing quality, making
Chapter 14: Strategies for Firm Growth
it larger or smaller, making it more convenient to use, improving its durability, or
making it more up to date.
B. Increasing the Market Penetration of an Existing Product or Service. A market
penetration strategy seeks to increase the sales of a product or service through
greater marketing efforts or through increased production capacity and efficiency.
C. Extending Product Lines. A product line extension strategy involves making
additional versions of a product so that it will appeal to different clientele. For
retail sites.
III. International Expansion
A. Assessing a Firm’s Suitability for Growth through International Markets. Table
14.3 in the textbook provides a review of the issues that should be considered,
including management/organizational issues, product and distribution issues, and
financial and risk management issues, when a venture considers expanding into
international markets.
B. Foreign Market Entry Strategies. The majority of entrepreneurial firms first enter
foreign markets as exporters, but firms also use licensing, joint ventures,
franchising, turnkey projects, and wholly owned subsidiaries. Those strategies are
explained in Table 14.4 in the textbook.
C. Selling Overseas. Many entrepreneurial firms first start selling overseas by
responding to an unsolicited inquiry from a foreign buyer. It is important to
handle the inquiry appropriately and to observe protocols when trying to serve the
needs of customers in foreign markets.
IV. External Growth Strategies
• External growth strategies rely on establishing relationships with third parties,
A. Mergers and Acquisitions
Chapter 14: Strategies for Firm Growth
C. Strategic Alliances and Joint Ventures
1. Strategic Alliances. A strategic alliance is a partnership between two or more
firms developed to achieve a specific goal. According to a recent survey, more
2. Joint Ventures. A joint venture is an entity created when two or more firms
pool a portion of their resources to create a separate, jointly owned
organization.
a. In a scale joint venture, the partners collaborate at a single point in the
value chain to gain economies of scale in production or distribution.
b. In a link joint venture, the position of the parties is not symmetrical, and
the objectives of the parties may diverge. For example, many of the joint
ventures between American and Canadian food companies provide the
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
1.
What are three lessons that other start-ups can learn from Crumbs’ failure?
Answer: The three lessons that can be taken from the three reasons Crumbs failed:
Lesson 1: Crowded markets are problematic. When a firm finds itself in a
crowded market, it’s important to diversify, so the “crowded” portion of
the market isn’t the only thing the business relies upon. Crumbs was faced
with an increasingly crowded market for gourmet cupcakes. It could have
added additional product lines, such as cookies, ice cream, and other
bakery products. By not doing so, it simply had to slug it out with a
growing number of competitors in the gourmet cupcake industry.
a “halo effect” surrounding them. Most articles in magazines such as Entrepreneur
and Inc. that focus on alliances relate stories of alliance successes rather than
alliance failures. So it is easy to assume that all alliances are successes.
2.
Think about the partnership arrangements with which you have been involved,
even if your experience has been limited to working with other students in team
settings in classes. What are some of the challenges in making alliances work that
are not mentioned in this feature?
Answer: This is a good question for an individual assignment.
3.
Do some Internet research and find an example of an alliance between a small firm
and a large firm that seems to be working well. Briefly describe the nature of the
alliance and explain its success.
Answer: This is a good question for an individual or group assignment. Good
sources to use to find examples of alliances between small firms and large firms
are entrepreneurship-focused magazines and blogs. A list of entrepreneurship-
focused magazines and blogs is included in this Instructor’s Manual.
4.
The “You be the VC 14.2” feature focuses on Zero Motorcycles, a start-up that is
building electric motorcycles that are lightweight, efficient, fast off the line, and
fun to drive. Brainstorm three to five likely alliance partners for Zero Motorcycles.
Explain how each partner can help Zero Motorcycles either increase its revenue or
decrease its costs.
Answer: This is a good question for an individual or group assignment.
REVIEW QUESTIONS
14-1.
What is the difference between an internal and an external growth strategy?
Answer: Internal growth strategies rely on efforts generated with the firm itself,
such as new product development, other product-related strategies, and
international expansion. Each of these strategies contributes to firm growth by
increasing the number, quality, or prevalence of the products that a firm sells or
by increasing the geographic breadth of the area in which it sells. External
growth strategies rely on establishing relationships with third parties, such as
mergers, acquisitions, strategic alliances, joint ventures, licensing, and
14-7.
What is an international new venture? Why might it be to the benefit of an
entrepreneurial start-up to position itself as an international new venture from
the outset?
MyLab Question.
14-8.
What are the six foreign market entry strategies and what are the key
characteristics of each one?
Answer: The six foreign market entry strategies are laid out in Table 14.3. The
six strategies are as follows:
Exporting. The process of producing a product at home and shipping it to a
foreign market. Most entrepreneurial firms begin their international
involvement as exporters.
Licensing. A licensing agreement is an arrangement whereby a firm with
the proprietary rights to a product grants permission to another firm to
manufacture that product for specified royalties or other payments.
Joint venture. A joint venture involves the establishment of a firm that is
jointly owned by two or more otherwise independent firms. Fuji-Xerox, for
example, is a joint venture between an American and a Japanese firm.
Franchising. A franchise is an agreement between a franchisor (the parent
company that has a proprietary product, service, or business method) and a
franchisee (an individual or firm that is willing to pay the franchisor a fee
for the right to sell its product, service, and/or business method). U.S. firms
can sell franchises in foreign markets.
Turnkey projects. In a turnkey project, a contractor from one country builds
a facility in another country, trains the personnel that will operate the
facility, and turns over the keys to the project when it is completed and
ready to operate.
Wholly owned subsidiary. A firm that establishes a wholly owned
subsidiary in a foreign country has typically made the decision to
manufacture in the foreign country and establish a permanent presence.
All correspondence should be personally signed.
Always be polite, courteous, friendly, and respectful.
For a personal meeting, always make sure to send an individual who is
equal in rank to the person with whom he or she will be meeting.
14-10.
What is the difference between a merger and an acquisition? How can
acquisitions help firms fill their needs?
Answer: A merger is the pooling of interests to combine two or more firms into
one. An acquisition is the outright purchase of one firm by another. Acquiring
another business can fulfill several of a company’s needs, such as expanding its
product line, gaining access to distribution channels, achieving competitive
economies of scale, or expanding the company’s geographic reach.
14-11.
What characteristics are associated with a promising acquisition candidate?
MyLab Question.
14-12.
What is the difference between a licensor and a licensee?
Answer: The licensor is the company that owns the intellectual property. The
licensee is the company purchasing the right to use it.
14-13.
What is the meaning of the term licensing? How can licensing be used to
increase a firm’s revenues?
Answer: Licensing is the granting of permission by one company to another
company to use a specific form of its intellectual property under clearly defined
conditions. Licensing can increase revenues via recurring royalties.
14-14.
What is the purpose of a licensing agreement? What is attractive about a
licensing agreement for those leading an entrepreneurial venture?
Answer: The terms of a license are spelled out through a licensing agreement,
which is a formal contract between a licensor and a licensee. The licensor is the
company that owns the intellectual property. The licensee is the company
purchasing the right to use it. A licensing agreement is attractive for those
leading an entrepreneurial venture because it enables growth without a
corresponding need for capital.
14-15.
What is the difference between technology licensing and merchandise and
character licensing? Provide examples of both types of licensing and how they
can increase a firm’s sales.
Answer: Technology licensing is the licensing of proprietary technology that
Chapter 14: Strategies for Firm Growth
example, Pfizer, Microsoft, and IBM are partners in a joint venture that is
developing software and services to handle administrative chores for
physicians’ offices. In a link joint venture, the positions of the parties is not
symmetrical, and the objectives of the partners may diverge. For example, many
of the joint ventures between American and Canadian food companies provide
the American partner with access to Canadian markets and distribution channels
and the Canadian partner with the opportunity to add to its product line.
APPLICATION QUESTIONS
14-21.
Spend some time studying Zero Motorcycles, the focus of the “You Be the VC
14.2” feature. Is it more likely that Zero Motorcycles will grow through internal
or external growth strategies? What internal growth strategies and/or external
growth strategies make sense for this firm?
Answer: Answers to this question will vary. Some students will argue that Zero
Motorcycles will grow primarily via internal growth strategies by adding new
products (different types of bikes, accessories), increasing the market
penetration of its existing products, and expanding internationally. International
expansion is another option. Other students will say that Zero Motorcycles is
more likely to grow via external growth strategies, not so much by mergers and
acquisitions, but more through strategic alliances, to get wider distribution of its
products.
14-22.
Jessica Martin, a classmate of yours, just returned from an entrepreneurship
boot camp that your university’s technology incubator sponsored. The boot
camp consisted of three days of intense focus on how to successfully launch a
firm. You overheard Jessica telling another classmate that the boot camp was
extremely helpful and she’s already signed up for another three-day boot camp
that will focus on how to successfully grow a firm. The classmate looked at
Jessica and said, “How in the world can you spend three days talking about how
to successfully grow a firm?” Jessica opened her notebook and showed the
classmate the 10-item agenda for the upcoming three-day boot camp. What do
you think the 10 items consist of? (Consider the material in Chapter 13 and this
chapter in formulating your answer.)
Answer: This is a good question for an individual or group assignment. The 10
chapter of the book.
14-23.
Think of a company that you’re familiar with that has grown via a product line
extension strategy. Provide an overview of the company and how it’s rolled out
Chapter 14: Strategies for Firm Growth
Answer: This is a good question for an individual or group assignment. An
example of a company that has grown via a product line extension strategy is
Apple. Not only does it have several versions (i.e., product extensions) of each
of its desktop and laptop computers, but also has several versions of its iPod,
iPhone, and iPad, each with varying levels of memory and other capabilities.
14-24.
Zynga is a social network game developer that develops browser-based games
that work both as stand-alone games and as application widgets on social
networking sites such as Facebook. What are the pluses and minuses of Zynga’s
approach to launching games that rely on another company’s platform (i.e.,
Facebook) to reach its intended audience? Is Zynga growing primarily via
internal or external growth strategies?
Answer: The obvious plus is that Zynga can piggyback on a popular platform.
The big danger in building a business on top of another business’s platform is
that if the other business changes its approach, your business can be adversely
affected. If Facebook decided to change the way it allows other businesses to
utilize its platform, for example, Zynga could lose a large share of its business
literally overnight. Zynga is utilizing primarily hybrid forms of growth. It
makes most of its games in-house, but deploys them through alliances with
external platforms, such as Facebook.
14-25.
Cisco Systems, Microsoft, and IBM often acquire small, technology-based
entrepreneurial firms. Why would Cisco Systems, Microsoft, and IBM, which
each employ hundreds of product development specialists and engineers, buy
other firms to acquire technology and add to their product lines, rather than
developing the technology and new products in-house?
Answer: Because even Cisco Systems, Microsoft, and IBM, despite their
technological prowess, don’t have all the answers. There are many
entrepreneurs working independently or as part of small companies that are
innovating and creating exciting new technologies. Because they are financially
strong, Cisco Systems, Microsoft, and IBM are able to act opportunistically and
snap up the small companies that they think have the most exciting technologies
and represent a good fit for their company.
14-26.
Google reportedly offered to buy Groupon for $5 billion to $6 billion in
November 2010—an offer that Groupon turned down. Why do you think
Google wanted to acquire Groupon, and why do you think Groupon declined
Google’s offer?
Answer: Google most likely wanted to acquire Groupon for two reasons: (1) to
benefit from the momentum that Groupon has achieved in the flash sale market,
and (2) to obtain Groupon’s management team and its intellectual property.
Chapter 14: Strategies for Firm Growth
303
YOU BE THE VC 14.1
Company: Farmers Business Network (https://farmersbusinessnetwork.com)
Business Idea: Create a platform that allows farmers to share data on all of their farming
practices. The data is then pooled with data from similar farms in order to create analytics
that provide farmers insights about costs, the best time to plant, the optimal amount of
fertilizer to apply, the best time to harvest, the optimal time to market their grain, and
other important factors.
You Be the VC Scorecard
Farmers Business Network
(https://farmersbusinessnetwork.com)
Item
Strength of New-Venture
Team
Strength of the Opportunity
Strength of the Industry
Chapter 14: Strategies for Firm Growth
Strength of the Industry
Strength of Business Model
Average Score
Case 14.1
14-34.
How is Warby Parker able to sell eyewear at such a low price?
Answer: As the case points out, eyewear costs a lot because Luxottica is a near
monopoly with an 80 percent share of the market. They can charge a high price
because there is not much choice for the customer. In addition, brand name
owners such as Calvin Klein charge hefty royalties (15 percent) that add to the
price customers pay. Warby Parker operates outside of the Luxottica ecosystem
and also doesn’t carry popular brands. The cost savings are passed on to