List the means available to a company for horizontal growth and explain why a company might pursue one over another.

List the means available to a company for horizontal growth and explain why a company might pursue one over another.

A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by increasing the range of products and services offered to current markets. Horizontal growth can be achieved by internal development or externally through acquisitions and strategic alliances. Depending on the company’s comfort with risk as well as the resources they have available, a company may select any of these strategies for horizontal growth.

7-2. Evaluate the types of retrenchment strategies that might be used by companies in stagnant industries.

Retrenchment refers to reducing the company’s level of activities. A turnaround strategy emphasizes the improvement of operational efficiency and is probably the most appropriate when a company’s problems are pervasive but not yet critical. A captive company strategy involves giving up independence in exchange for security. A company with a weak competitive position may not be able to engage in this strategy. The sell-out strategy makes sense if management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the entire company to another firm. Bankruptcy involves giving up the firm to the courts in return for some settlement of the corporation’s obligations. Finally, liquidation is the termination of the firm all together.

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

7-3. How does horizontal growth differ from vertical growth as a corporate strategy? From concentric diversification? (LO 3)

Students often confuse these three strategies. Horizontal growth is the expanding of a firm’s activities into other geographic regions and/or by increasing the range of products and services offered to current markets. It often involves the acquisition of another firm in the same industry (an example of external growth), but it could also be through the expansion of a firm’s products in its current markets (e.g., through line extensions) or expansion into another geographic region (an example of internal growth). One example of external horizontal integration was the acquisition of Miller Brewing by South African Breweries. An internal example is Lowe’s expansion into the northern and western U.S. Vertical growth, in contrast, involves a firm’s taking over a function previously performed by a supplier or a distributor. This would typically involve the addition of activities in other industries either forward (downstream) or backward (upstream) on the industry value chain of current products or services. The additions are primarily justified in terms of support of the current product lines regardless of their being in other industries (and thus can be argued to be diversification). Concentric diversification, in contrast, is the additio,,,,,,,,,

What are the tradeoffs between an internal and an external growth strategy? Which approach is best as an international entry strategy? (LO 4)

As pointed out in the text, research generally concludes that firms growing through acquisitions do not perform financially as well as firms that grow through internal means. There are, however, some tradeoffs for each approach. Here are some of them:

Internal Growth

Pros

More likely to be based on some proprietary development giving competitive advantage.
More likely to fit well with current business units/products.
Can finance slowly out of returned earnings.
If plan is no good, can always cut losses before in too deep.

Cons

May take a long time to develop a new product or new concept.
May be hard to get current managers to try something new.
May ignore other uses of money with quicker return.
Favored program may take time away from current businesses

External Growth

Pros