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Different types of Growth

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Hyper Growth

• Hyper growth is what takes place on the steep part of the

growth curve. It is a dizzying, company-stretching type of

growth

• Hyper growth means extremely rapid growth, and

businesses that grow at this rate are said to experience

a radical expansion. Companies in this category are,

among others, Facebook, Uber, Dropbox and Twitter

• Hyper Growth experiencing “S” Curve

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• The World Economic Forum sayscompanies need to have a compoundannual growth rate (CAGR) of greaterthan 40%.

• Translation: Achieving hypergrowth meansmaintaining a 40%+ average annual growthrate for more than one year.

• In contrast, “rapid growth” companies aredefined as having a CAGR of between 20%and 40%, while “normal growth” companieshave CAGRs of less than 20%

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Stage of Hyper Growth

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The 3 Stages of Hypergrowth

• 1. The Edison Stage• This stage of business is defined by invention. It’s the

stage Edison went through when he was creating thelight bulb. You’re investing all your time trying to figureout:

• Can we actually build this thing?

• Is it possible to build this thing?

• And this is really the phase where patents come intoplay, where invention comes into play, and this is the

first phase of a market.

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2. The Model T Stage

• The Model T stage, just like the name implies, iswhen Henry Ford took something that had beenpreviously invented, which was the automobile,and figured out how to bring it to the masses.

• This stage is about building factories. And it’sabout operational moats that you build in yourbusiness.

• While in the Edison stage you’re still findingearly adopters and building your tribe, in theModel T stage you tribe goes mass market.

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3. The P&G Stage

• This is the stage we (Drift) are in now, and we call itthe P&G (a.k.a. Proctor & Gamble) stage. Becausein this stage, it’s all about investing in your brand.

• It’s about selling Tide laundry detergent and getting20 cents more for a box of Tide than for a box of Allor a box of Cheer or a box of whatever laundrydetergent.

• In this stage, you’re trying to create a moat aroundbrand, and brand preference.

• You’re helping a global audience answer thequestion, “Why do I want to buy this brand versusanother?”

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Five Rules for Hypergrowth Management

• 1. Focus first on sales

• 2. Innovate with caution

• 3. Standardize structures and processes

• 4. Delegate decisions to field managers

• 5. Reward action and initiative• Source: Harvard business review

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1. Focus first on sales

• Rule #1 Sell First and Ask Questions Later

• Focus on capturing as much of the market as possible.

• Chose just one simple metric for goal setting and

performance measurement

2. Innovate with caution

• Rule #2 Don’t Try Too Hard to Innovate

• Do not fall into the trap of looking too far ahead in

technological terms

• Look at a technology and how people are using it, and

then work out whether and how to apply it in your own market instead of going in blind,

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3. Standardize structures and processes

• Rule #3 Organize Like McDonald’s

• Use standardize technologies, organizational structures,

and business processes across all the company’s

operations.

4. Delegate decisions to field managers

• Rule #4 Push Decisions Out to the Front Line

5. Reward action and initiative

Rule #5 Foster a Can-Do Culture

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Issues with hyper growth

• Risk of overtrading

• Externally driven growth is likely to hide

internal weakness

• Over focus on bottom line but less focus

on bottom line

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Organic Growth

• Expansion of a firm's operations from its own (internally generated)

resources, without resorting to borrowing, acquisition or merger with other

firms.

• Organic growth strategy involves strengthening company using its own

energy and resources.

• Profits may have been re-invested to increase capacity e.g. the building of

new stores

• Sales increase through:

– Selling to more customers in existing markets

– Finding new markets

– Launching new products

• Apple has embraced this strategy over its existence, until 2010

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Apple Growth• Apple’s run of incredible products (and growth) has been

achieved with a staggeringly low R&D spend. How low?

Apple only spent $4.6 billion on R&D over the past four

years, while revenues soared from $25 billion to $43

billion.

• In contrast, Microsoft spent 700% that amount on R&D

during the same period, a whopping $31 billion, while

growing at an anemic pace, despite flippant M&A.

Likewise Cisco and Intel spent about 400% as much as

Apple on R&D – $19 billion and $23 billion respectively.

These are astounding differences above Apple's research

and development spend, especially considering thatduring this period Apple developed the iPhone and iPad.

Organic growth involves strategies

• Developing new product ranges

• Launching existing products directly into new

international markets (e.g. exporting)

• Opening new business locations – either in the domestic

market or overseas

• Investing in additional production capacity or new

technology to allow increased output and sales volumes

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Benefits of organic Growth

• Developing company’s strengths through organic growth

can make a stronger competitor in the industry

• Increase market share and improve customer retention.

• Less risk than external growth (e.g. takeovers)

• Can be financed through internal funds (e.g. retained

profits)

• Builds on a business’ strengths (e.g. brands, customers)

• Allows the business to grow at a more sensible rate

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Drawback of organic Growth

• Growth achieved may be dependent on the growth of the

overall market

• Hard to build market share if business is already a leader

• Slow growth – shareholders may prefer more rapid

growth

• Franchises (if used) can be hard to manage effectively

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Inorganic Growth

• Inorganic growth arises from mergers or takeovers rather

than an increase in the company's own business activity.

Pros

• Potential for substantial and quantifiable growth: Many

businesses will nearly double or triple their list of clients

with a business merger.

• Immediate rewards: You get a bunch of new clients. Start

servicing them as quickly as you can to get things up

and running.

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Cons

• High upfront cost: Buying or merging with another

business is not cheap, and you will usually have to shell

out some big bucks upfront to make it happen. If you don’t

have the cash on hand, you’ll have to rely on a business

loan to purchase the business.

• Transfer risk: Inorganic growth only works if the buyout or

merger is a success. If the client transfer bombs, then your

cash and growth chances are gone.

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Organic vs Inorganic Growth

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The strategy of inorganic growth takes place by:

Acquisitions

Merger

Joint Venture

Strategic alliances

Replication( Franchising & Licensing)

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Inorganic Growth-

Growth by acquisition

• purchase of one company by the another company. The

term refers to the acquisition of a public company whose

shares are listed on a stock exchange.

• Types of Takeover:

Friendly Takeover –

Hostile Takeover –

Reverse Takeover

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• A friendly takeover

• As the name suggests, a friendly takeover occurs when the target company ishappy to be acquired – its directors and shareholders have approved the offeror bid.

• In a friendly takeover situation, the bidder will tell the target’s board ofdirectors about its intention and makes an offer. When the board advises its

shareholders to accept the offer, the friendly takeover usually goes ahead.

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Hostile Takeover –• In a hostile takeover situation, the target company does not want to be

acquired by the bidder. This can only really happen in a publicly-listed

company, because in a private company the board members are nearly

always the majority shareholders, and if they don’t like the bidder they

won’t sell their shares, and no deal is possible

• i.e

• AOL and Time Warner, $164bn, 2000

When AOL announced it was taking over the much larger and successful Time

Warner, it was hailed the deal of the millennium. But the dotcom boom meant

the new AOL Time Warner lost over $200bn in value in less than two years.

AOL and Time Warner combined their businesses in what is usually described

as the worst merger of all time.

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A reverse takeover

• A reverse takeover occurs when a private company purchases a

publicly-listed company.

• This is usually prompted by the larger, private company. It is an

effective way for the private company to ‘float’ itself without having to

go through all the expense and time involved in a conventional IPO

(initial public offering).

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Growth by Merger

• Two business are dissolved in to each other

• Legally Mergers are effected by exchange of the pre-merger stock (shares) for the stock of the new firm.Owners of each pre-merger firm continue as owners,and the resources of the merging entities are pooled forthe benefit of the new entity.

• If the merged entities were competitors, the merger iscalled horizontal integration, if they were supplier orcustomer of one another, it is called vertical integration.

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Types of Merge

• Horizontal integration

– Firms are in the same industry and the same stage of production

e.g. two car manufacturers join together

• Backwards vertical integration

– A firm takes over a supplier e.g. car manufacturer takes over a

windscreen supplier

• Forwards vertical integration

– A firm takes over a customer e.g. car manufacturer merges with

a sales dealership

• Conglomerate integration (diversification)

– Integration occurs between firms in unrelated industries e.g. car

manufacturer joins with a bakery

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Local Acquisitions and Mergers

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Rank Company Name Purchased

1 Richard Pieris & Company

PLC - This is one of the

largest and most successful

diversified business

conglomerates based in Sri

Lanka.

A valuation was carried out on behalf

of Richard Pieris & Co. PLC for the

purpose of the acquisition of RPK

Management Services (Pvt.) Ltd., the

management company of Maskeliya

Plantations PLC and Kegalle

Plantations PLC.

2 Hayley’s MGT Knitting

Mills PLC - This is the

second largest knit fabric

manufacturer in Sri Lanka.

Hayleys MGT Knitting Mills PLC and

Hayleys ADC Textiles Limited

employed NDBIB as financial

advisors to rationalize its capital

structure and to launch a suitable

Employee Share Ownership Plan

(ESOP) scheme. Two companies

merged together.

3 Master Divers (Pvt) Ltd -

Company has engaged in

many off-shores and harbour

based marine activities and

maritime construction work in

Thailand, Maldives, India,

and Singapore and in the Port

of Damam, Saudi Arabia.

MDL acquired 53.35% shareholding

of Pelwatte Sugar Industries Limited

(PSIL) held by the Government of Sri

Lanka through a privatization. NDBIB

acted as the financial advisor and the

arranger of funds for MDL in the

above acquisition.

4 Nations Trust Bank PLC

and Mercantile Leasing

Limited - Considered most

customer-centric financial

institutions today.

Nations Trust Bank PLC and

Mercantile Leasing Limited merged

together. The merger was carried out

by offering NTB shares to MLL

shareholders as consideration based

on the share swap ratio recommended

by NDBIB.

5 Eagle Insurance Company

PLC - This is one of the

leading life insurance

companies in Sri Lanka. Eagle

NDB through its subsidiary Capital

Development & Investment Company

PLC (CDIC) acquired 58.44% of

Zurich NDB Finance Lanka Ltd., the

What is JV????

& what is difference between Merger & JV

Its Marriage

Joint Ventures

• A joint venture (JV) is a business arrangement in which two ormore parties agree to pool their resources for the purpose ofaccomplishing a specific task or economic activity togther.

JV Agreement

• Regardless of the legal structure used for the JV, the mostimportant document will be the JV agreement that sets out all ofthe partners' rights and obligations.

• The objectives of the JV, the initial contributions of the partners,the day-to-day operations and the right to the profits (andresponsibility for losses) of the JV are all set out in thisdocument. It is important to draft it with care, to avoid litigationdown the road.

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Difference Between Mergers and Joint Ventures

• When two firms merge, they cease to exist as

independent firms. A new and separate legal entity

controlling the assets of both firms

i.e “ A” Ltd & “ B” Ltd merge together as “AB” Ltd.

After, “ A” Ltd or “ B” Ltd no longer to be exist.

• in a joint venture, a new separate firm is formed, but the

original companies continue to exist on their own.

• “ A” Ltd & “B” Ltd formed separate entity called AB JV.

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Famous JV

• Microsoft and GE Joint Venture, Caradigm2011, Microsoft Corporation and General Electric formed a joint venture which

is a health IT company of its own kind.

• The Hisun-Pfizer Joint VentureThe world’s largest drug company, Pfizer, and a Chinese pharmaceutical

company, Zhejiang Hisun, formed a joint company in the Chinese city of Hang

Zhou

• Chery Jaguar Land Rover Automotive Company.The British luxury car manufacturers entered into a joint venture with the

Chinese company Chery Automobiles. The joint venture company is known as

Chery Jaguar Land Rover Automotive Company.

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Restructuring, and Corporate Governance, 3/e Weston - 36

• Characteristics of joint ventures– Limited scope and duration

– Generally involve only two firms

– Involve only small fraction of participants' total activities

– Each participant offers something of value

– Joint production of single products

– No sharing of assets/information beyond venture

– Joint property interest in subject matter of venture

– Right of mutual control or management of enterprise

– Right to share in cash flows of the enterprise

– Limited risk

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Goals/objectives of joint ventures

• Risk sharing

o Each participant diversifies risk

oReduces investment cost of entering risky new

area

oRealizes benefits of economies of scale,

critical mass, learning curve effects sooner

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• Knowledge acquisition — learning experiencefor both partners

– Shared technology

– Shared managerial skills in organization, planning,and control

– Successive integration — joint venturing as a wayto learn about prospective merger partners

• Entry into new, expanded, foreign markets

– Augments financial or technical capabilities

– Reduces risk

– Foreign country may require joint venture with localpartner

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• Financing — to raise capital

– Share investment expense

– Small company has product idea but no cash

– Joint venture with large company that has cash

to develop product

• Distribution/marketing

– To obtain distribution channels

– To obtain raw materials supply

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Advantages of forming a Joint Venture?

• Provide companies with the opportunity to gain new capacity and expertise

• Allow companies to enter related businesses or new geographicmarkets or gain new technological knowledge

• access to greater resources, including specialized staff and technology

• sharing of risks with a venture partner

• Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

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The Disadvantages of Joint Ventures

• It takes time and effort to build the right relationship and partneringwith another business can be challenging. Problems are likely toarise if:

• The objectives of the venture are not 100 per cent clear andcommunicated to everyone involved.

• There is an imbalance in levels of expertise, investment or assetsbrought into the venture by the different partners.

• Different cultures and management styles result in poor integrationand co-operation.

• The partners don't provide enough leadership and support in theearly stages.

• Success in a joint venture depends on thorough research andanalysis of the objectives.

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Building Successful Joint Ventures

• “Joint Ventures and Alliances can deliver more

shareholder value than M&A can, but getting

them off the ground can trip you up in

unpredictable ways”

Harvard Business Review

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History of Joint Ventures

• A study published in Harvard Business Review

in 2002 reveled that a whopping 47% of joint

ventures fail!!

– Reason cited are:

– Wrong Strategies

– Incompatible Partners

– Weak Management

– Unrealistic or inequitable Deals

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Critical Success Factors in a Joint Venture

• Good communication & cooperation and coordinationamong partners

• Common goals and shared vision among partners

• Dedication towards the success and long termsustainability of the JV

• Proper sharing of profits and benefits among partners

• JV should work towards the benefit of all the partners

• Proper planning and research prior to theincorporation of the JV

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Factors hindering the success of a JV

• Lack of understanding between the partners• Lack of patience and motivation among partners3.• Entry of a wholly owned subsidiary of a partner in the

same business and market (E.g.. Hero Honda)4.• Benefits lower than the expectations5.• Operational Difficulties due to geographical location of

the partners6.• Differences and conflicts between partners on various

issues.• Incompatibility of the culture and management styles

of the partner

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• Successful Joint Ventures

– VOLVO – EICHER JV

– TATA – DOCOMO

• Failed Joint Ventures

– Chrysler – Diamler AG

– Yamaha – Escorts

• JVs Leading to Takeover by one partner

– Hero Honda (Takeover by Hero Group)

– Virgin – TATA

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Strategic Alliances

Gallo, the world’s biggest maker of wine, does not grow a single grape and

similarly,

Nike, the world’s largest producer of athletic foot-wear, does not produce a

single shoe,

Boeing, the giant aircraft company, makes little more than cockpits and wing

bits. These organizations, like a number of other businesses nowadays, have

created strategic alliances with their suppliers to do much of their actual

production for them.

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Strategic Alliances

• A strategic Alliance is an agreement for cooperation

among two or more independent firms to work together

toward common objectives. Unlike in a joint venture,

firms in a strategic alliance do not form a new entity to

further their aims but collaborate while remaining apart

and distinct

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• Partners may provide the strategic alliance with resources

such as products, distribution channels, manufacturing

capability, project funding, capital equipment, knowledge,

expertise, or intellectual property.

• The alliance is a cooperation or collaboration which aims

for a synergy where each partner hopes that the benefits

from the alliance will be greater than those from individual

efforts. The alliance often involves technology transfer

(access to knowledge and expertise), economic

specialization, shared expenses and shared risk.

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World example for SA

• Spotify and Uber

Leaping forward to a very recent piece of news, Spotifyand Uber have partnered to provide stereo control toUber customers. Not every Spotify consumer usesUber, nor does every Uber rider have a Spotifyaccount. The strategic alliance allows eachcompany to pursue prospects from the other’sexisting customer base, all while continuing to promoteboth products.

– In both cases, it gives the company a leg up over itscompetition. Spotify is offering something with the Premiumpackage that other streaming services do not yet have. Andlikewise, Uber can provide the riders with an opportunity tolisten to their own playlists as opposed to other ride-shareservices that cannot match them yet.

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• Hewlett-Packard and Disney

This alliance formed back when Mr. Hewlett, Mr. Packard, and Mr.

Disney were all still involved with their respective companies. During the

creation of Fantasia, Disney purchased some audio equipment from

Hewlett-Packard. The strategic alliance continued onwards, as Disney

relied heavily on HP’s development and IT team for it’s own

infrastructure.

In fact, at current-day Disney attractions, the Imagineering team is still

quite married to the HP systems architecture. During the design and

build phase of Disney’s Mission:SPACE, HP engineers and Disney

imagineers were working side by side to create the most

technologically-advanced ride yet.

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Uber & Toyota

• One of the biggest car manufacturers in the world has announced

that it has formed a strategic alliance with one of the biggest ride-

hailing services in the world. The alliance will enable more drivers to

get on Uber, allowing Toyota to sell more cars in the process while

the increase in drivers will help Uber put more drivers on the road to

cater to rising demand.

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Some other Strategic alliances for specific reasons

• In R &D

– CISCO Systems’ agreement with China’s biggest on-line commercial company Alibaba, to

explore business services for SMEs.

• In Manufacturing

– Chrysler – Fiat partnership to build compact and subcompact jeeps

– GSK – Dr. Reddy Labs: The Indian company will manufacture nearly 100 products mainly

under GSK brand name for sale in some emerging markets.

• In Marketing:

– WIPRO – GE joint venture to distribute approximately 85% of GE’s healthcare products and

solutions in India.

• For Sales

– Nestle and General Mills (US) agreement whereby the product Honeynet Cheerios was

made in General Mills’ US plants, shipped in bulk to Europe for packaging at a Nestle plant

and then marketed in France, Spain and Portugal

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• In Technology – ICICI Bank and Vodafone India: A strategic alliance example in India is of ICICI Bank, India’s

largest private sector bank and Vodafone India, one of India’s largest telecom service

providers, entered into a strategic alliance to launch a unique mobile money transfer and

payment service called ‘m-pesa’.

– Microsoft India and TCS: Microsoft India and Tata Consultancy Services (TCS) entered into a

strategic alliance to launch Microsoft-TCS virtualization Center of Excellence (CoE). It is

designed to help customers experience the right approach to applying and managing

virtualization across IT architectural layers

– The HP and Microsoft global strategic alliance is amongst the longest standing alliances of

this type, with well over Twenty five years of combined marketplace leadership aimed at

helping customers and channel partners worldwide enhance productivity by using innovative

technologies.

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Motives for Strategic Alliances

Sharing costs and risks

Combining complementary skills

Formulating technical standards and dominant designs

Accessing new markets and technologies

Preempting key competitors

Reserving learning opportunities