Question

Tesco plc wants to expand but foresees little exponential growth in its current retail activities. The company has, therefore, decided to utilise their ability to raise funds and their cash generation ability to organically expand into the hotel industry. Tesco feels that the market is open to a new participant and that companies such as Intercontinental Hotels Group plc are not ready for a vibrant new competitor. Tesco could expand by undertaking ‘organic’ growth orcould undertake the indicated growth by acquisition. You are required to provide a critical analysis of the relative benefits of the two types of growth (i.e. ‘organic’ and acquisition) from Tesco’s point of view, with regard to the proposed expansion.

Answer 1

Organic growth refers to expansion of a business using internal resources. This may be achieved by expanding the product range or expanding in terms of the number of units opened at different locations. As the name suggests organic growth refers to growth from within on the basis of the capabilities and resources of the business. Strategies include development of new products, expansion of customer base, entry into new markets and investment in new technology or additional production capacity. The cost involved in this method is low as the internal resources of the business or put to use. Also there is complete capacity utilisation in case the capacity remains underutilized. As compared to acquisition that is lesser risk and the existing methods of the business can be continued. Acquisition refers to purchase of a new company and using the resources and capacity of that company. The major problem under this method is that there is a completely new culture that needs to be merged into the current culture of the company. There may be conflicts as far as the any new employees are concerned which is absent in organic growth.

The benefit of an acquisition is that an existing business with additional resources are taken over and this presents huge opportunities and scope for expansion. Also there is the benefit of synergies that would be created with the acquisition and the strengths of the aquired company can be used to leverage the business of the current company.