Question

Elaborate any four external growth strategies a venture can enjoy ?

Answer 1

Sometimes, a firm intends to grow externally when it takes over the operations of another firm. Such growth may be possible via mergers, takeovers, joint ventures, strategic alliances etc. Such growth is called ‘inorganic growth’. Firms generally prefer the external growth strategies for quick growth of market share, profits and cash flows.

Four external growth strategies a venture can enjoy are as under:

1. Merger:

Merger is defined as ‘a transaction involving two or more companies in the exchange of securities and only one company survives'. When the shareholders of more than one company, usually two, decides to pool the resources of the companies under a common entity it is called ‘merger’.

2. Takeover:

A takeover generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company. The main objective of takeover bid is to obtain legal control of the company. The company taken over remains in existence as a separate entity unless a merger takes place.

3. Strategic Alliances:

Strategic alliance is an arrangement or agreement under which two or more firms cooperate in order to achieve certain commercial objectives. The motives behind strategic alliances are to reduce cost, technology sharing, product development, market access, availability of capital, risk sharing etc.

4. Joint Ventures:

All joint ventures are typically characterized by two or more ventures being bound by a contractual arrangement which establishes joint control. Such an arrangement ensures that no single venturer is in a position to unilaterally control the activity.