Case study: Growing a Company by International Acquisition

 Case study: Growing a Company by International Acquisition

https://my.uopeople.edu/pluginfile.php/1183241/mod_workshop/instructauthors/UNIT%207%20-%20Case%20Study%20-%20dsgplc_13_full.pdf.

i. Describe two major ways in which a company can grow

The two major ways in which a company can grow are organic and inorganic growth. Organic growth means the company expands its current business without launching new products or services for a whole new market. For instance, if Tesla can now manufacture its model 3 from 5,000 vehicles per week to 6,000 per week, build its gigafactory more quickly, or improve its battery performance without introducing any new products is called organic growth.

 

On the other hand, inorganic growth occurs when a company expands to a new territory or product line. For instance, if Starbucks merges with the Oatly group for providing more oat milk drinks, both of them will have a newer product line and it comes under the rubric of inorganic growth.

ii. Businesses grow when they have the resources to expand and opportunities exist for growth. Explain how the acquisition of Berendsen provided such a good opportunity for the Davis Service Group

Intro

The Davis Service Group is the company group that provides textile maintenance services in the UK and Europe, includes linen hire, workwear rental, dust control mat, laundry, and washroom services. The Group operates across Europe from its London headquarters and used to be a conglomerate. In 2001, the Davis Service Group consisted of three main operating companies, Sunlight (hiring sheets to hotels, hospitals, and private businesses), Elliott (building systems), and HSS (operating through 450 outlets in the UK). Instead of operating only in the UK, it seeks overseas opportunities for growth. 

So, how the acquisition of Berendsen provided such a good opportunity for the Davis Service Group? 

Berendsen is a company operating in Denmark, Sweden, Norway, Austria, the Netherlands, Poland, and Germany. It is the first advantage for the Davis Service Group to acquisition it. It providing textile services in its geographical area and none of them overlap the areas of the Davis Service Group was operating in. Therefore, if the Davis Service Group acquired Berendsen, it can build on Berendsen’s local experience, local market contacts, and integrate the networks and customer relationships. By taking over Berendsen, rather than merging with it, gave Davis Service Group the control to manage the system of Berendsen. 

By closing down some locations where Berendsen has operated in the same area, the operating costs can be reduced. It also saves the fixed costs, by cutting out the central headquarters of the company. Lower costs mean higher profits. Moreover, Sunlight and Berendsen are specialist companies in the same field. The knowledge and expertise of the two companies are very likely to be both benefited.

However, there are many common barriers to international growth such as language differences, cultural differences, and currency. In this acquisition, Berendsen’s business operates across several European countries and uses English as a common language. So, the first barrier is overcome. Next, the consumer behaviors and the culture where Berendsen operates are similar to the UK. Finally, the currency, countries in which Berensden operates already used the Euro. I think Berendsen has already created a processing practice to deal with the Euro, but the managers still face the challenge of the exchange between Euro and British pounds.

iii. What aspects of European Union markets have particularly encouraged horizontal growth of the Davis Service Group? 

A horizontal growth strategy means expanding products or services to new markets such as developing a new market, penetrating an existing market, or apply existing assets to a new business domain. For the Davis Service Group, Denmark, Sweden, Norway, Austria, the Netherlands, Poland, and Germany are whole new markets. The Davis Service Group can get the ticket to enter by purchasing Berendsen. However, this may increase the competition, but European Union may tend to lower the prices by encouraging such competition.

What aspects of European Union markets have particularly encouraged organic as opposed to inorganic growth?

Organic growth is the growth a company achieves by increasing output and enhancing sales internally. But, it does not include growth attributable to mergers and acquisitions, it is an increase in sales and expansion through the company's own resources. In contrast to inorganic growth, which is growth related to activities outside a business's own operations and arises from mergers or takeovers rather than an increase in the company's own business activity. The European Union market may particularly encourage organic growth since it means more companies or organizations will be set up and more companies mean more competitors to operate in the same market. 

iv. If the company were to expand into new areas of the globe, where would you recommend? Why? 

I think I will highly recommend the company to expand into Asian developing countries. Because it all about growth. As of 2020, about 59.51% of the global population was living in Asia.

What factors might encourage or discourage this choice?

The demographic factor is one of them. As I mentioned above, As of 2020, about 59.51% of the global population was living in Asia. It is a huge opportunity for growing a company or an enterprise.

Of course, there are also some disadvantages. One of them is skills and knowledge. They may not have the skills and techniques that foreign companies need to operate and manage their businesses.

Reference

Controlling International Expansion (Vermeulen, 2001)

What is the responsibility of Western countries toward the economic development of developing countries?

 What is the responsibility of Western countries toward the economic development of developing countries? 

Most of the time, when we talk about globalization, it is all about economic growth, international trade, and information interchange. Like previously discussed, Nike benefits from globalization. However, does it really benefits those developing countries where Nike is operating? In the beginning, Nike just tried to lower the cost of production by producing its products in those low-income and low-wage countries. After some negative effects on its brand, such as child labor and poor working conditions in Nike's foreign factories, Nike changed its strategy to redeem its brand image. Nike improved the working conditions and published detailed information about its supplier policies, audits, and remediation processes. 

But, do these processes enough to help and those developing countries? I think it is more likely to unequally distribute the benefits back to where they came from. This is one of the basic business rules. If there is a profit, there is a business. A company like Nike is trying to benefit from those direct investments, not doing charity to take care of the local laborers. However, after some remediation processes, the local laborers did get jobs, get paid more, and learned some new skills. They can grow from the accumulated knowledge they learned and build their own empires. Instead of just rely on the teacher to teach you something, you can choose to learn more by yourself. If a country always imports anything they need, it is very likely to be controlled by other countries. During the pandemic of COVID-19, vaccines have become a life-saving product. However, those poor countries seem they do not have the ability to produce vaccines of their own.

One of the key factors is the crucial resources, techniques, technologies, and knowledge is controlled by these big companies and Western countries. Education is the key to better competitive advantages. If those developing countries can build their own excellent education systems, they may not be just developing countries anymore. However, most developing countries are dragging by their corrupt bureaucracy. High efficient governments can lead their residents to follow up the steps of a better future, whereas corrupt bureaucracy just makes things worse.

Do the math. Suppose that Nike invests and builds its own factory in Indonesia. Then, it produces the products at a lower cost of $5 per pair of shoes instead of $100 cost per pair in the US. If Nike sells one million shoes worldwide per year, it will gain $95 million more profit per year due to the lower cost of production. Now, compare to the wages that Nike paid to the laborers, suppose it is about $4 per day, $9,600 per year. If Nike hired 1,000 workers to produce the products, it has to pay $9.6 million per year. It is almost 10 times less than it gains $95 million more profit per year. For Indonesia, the 1,000 jobs only contribute $9.6 million per year to overall income growth. But for Nike, it is more than that. 

In conclusion, I think there are no clear responsibilities for companies or Western countries to do anything for developing countries since it is an ethical issue and making money is all business owners care about the most. However, if enterprises do their businesses more kindly, honestly, and with integrity, it is also a way to gain their profits by increasing sales and consumer loyalty. 

Reference

New Idea. (2019, December 11). Nike Sweatshops: The Truth About the Nike Factory Scandal. New Idea. https://www.newidea.com.au/nike-sweatshops-the-truth-about-the-nike-factory-scandal.