ENTERPRISE GROWTH STRATEGIES

Value addition refers to value added to the goods and services through different means so as to create a new product that has greater value to customers.

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Bottom Line The primary activities within Michael Porter's value chain are used to provide a company with a competitive advantage in any one of the five activities so it has an advantage in the industry in which it operates.

What Is a Value Chain?

“Strategy is the direction and scope of an organization over the long-term. It helps achieve an advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of&nbsp;<a href="https://www.toppr.com/guides/business-economics/meaning-and-types-of-markets/market-meaning-and-classification/">markets</a>&nbsp;and fulfill&nbsp;<a href="https://www.toppr.com/guides/accountancy/financial-statements/stakeholders-and-their-information-requirement/">stakeholder</a>&nbsp;expectations.”

3. Proprietary Statements: This part tells how the franchise name is to be used. What marketing and advertising procedures is required to follow. It also documents how much the franchisee will be required to contribute toward national advertising efforts. 4. Ongoing Site Maintenance: It includes the types and time frames regarding various maintenance items and upgrades that must be made to the franchisee’s location.

Some of the disadvantages to franchising to franchisor are as follows: &nbsp;Difficulty in identifying quality franchisees: (a) Sometimes the franchisor may find it difficult to identify quality franchisees. (b) Even after extending all support towards training and providing capital, poor management may lead to the failure of the franchisee and in turn, which may affect adversely franchisor and the system as a whole. Legal Regulation: (a) Franchising is a regulated activity and requires follow with federal and state franchise laws. (b) To successfully establish a franchise, franchisors are required to work with an experienced franchise lawyer to establish a solid blueprint for franchising. Investment:&nbsp;Every one knows that franchising serves as a source for the capitalized expansion of your business (i.e., franchisees invest in your expansion), the establishment of a franchise system requires the investment of capital to cover legal fees and the cost of establishing a franchising infrastructure.

Vertical merger: This occurs between two companies which are producing different goods or services for one specific finished product. It occurs when two or more firms that offer products which are part of an industry’s supply chain merge their operations. The purpose of merger is to increase synergies created by the merging entities and operate more efficiently as a single business unit.

Acquisition: Acquisition also called as takeover is a process where in an organization purchases all or almost all the ownership stakes of another organizations so as to take complete control of that organization. The payment is done either through cash or the acquiring company’s stock or both. There are four types of acquisisions: Friendly Reverse Back flip Hostile

Merits of Franchising: &nbsp;Proven idea:&nbsp;Business is based on a proven idea. Success of the product can be checked in the market. Profit from brand recognition:Franchises develop an image in the marketplace. This saves both time and money of advertising, promotion, recognition, etc. Image of the product is a favourable one and is in the minds of consumers. Recognized brand name and trademarks:&nbsp;Entrepreneur gets a recognized brand name and trademarks. Benefit from any advertising or promotion by the parent company automatically benefits the franchise. Support from parent company:&nbsp;The franchisor gives support in the form of training, help setting up the business, a manual telling how to run the business and ongoing advice. Exclusive rights of the territory:&nbsp;The franchisor can’t sell any other franchises in the same territory which leads to the creation of monopoly power in the territory. Easier Financing:&nbsp;Financing the business becomes easier due to the associated brand name. Banks are more likely to lend money to buy a franchise with a good reputation.

Horizontal merger: When two companies which are in the same industry merge, it is called as horizontal merger. It occurs between companies that are competitors in the same industry and are offering the same goods or services. This type of merger usually occurs in the industries where there are few competitors and the competition is high. When these industries merge they’ll have much bigger synergies and potential gains.

What are the main ingredients of a franchise agreement? 1. Contract Explanation: This part of the agreement outlines the type of relationship a&nbsp;franchisee is going to have with the franchisor. 2. Operations Manual: It is the section of the agreement that details the guidelines that the franchisee must legally follow. Amendments may be made from time to time and the franchisee has to adjust operations accordingly. The franchisee has to maintain the confidentiality.

Conglomerate: When two companies which are in entirely different businesses merge, it is called as conglomerate. It is further classified as Pure conglomerate: In this the two firms have nothing in common. Mixed conglomerate: In this the two firms are looking for product or market extensions.

Back flip acquisition: The purchasing company will become the subsidiary of the purchased company. This occurs very rarely.

Internal growth strategy refers to the growth within the organisation by using internal resources. Internal growth strategy focus on developing new products, increasing efficiency, hiring the right people, better marketing etc. Internal growth strategy can take place either by expansion, diversification and modernisation.

The advantages of franchising to the franchisor Quick expansion: (a) Franchising for allows an entrepreneur an easy way to start the business the venture and to expand quickly using little capital. (b) It helps to reflect on the problems and issues that an entrepreneur faces in trying to manage and grow a new venture. Cost advantages: Many franchise businesses produce parts, accessories, packaging and raw materials in large quantities, then in turn sell these to the franchisees. The franchisee are usually required to purchase these items as part of the franchise agreement and they usually benefit from lower prices. One of the biggest cost advantages of franchising a business is the ability to commit larger sums of money to advertising.Each franchisee contributes a percentage of sales (1 to 2 %) to an advertising pool.

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Friendly acquisition:&nbsp; The acquisition occurs through mutual approval of both the companies. The process is friendly.

Disadvantages of Franchises

Value addition refers to creation of a competitive advantage by, combining, packaging features and benefits or through any other method that results in greater customer acceptance. Its examples are: Offering one year of free support on a new computer would be a value-added feature. Turning cotton into fabric. Here, fabric has more usefulness than cotton. &nbsp;Turning milk into cheese. Cheese has got more specific uses than milk. Packaging ready-to-use grated cheese into serving size packets. &nbsp;Turning wood into paper. Utility of paper is more than wood.

Franchising Franchising began back in the 1850's when Isaac Singer invented the sewing machine. In order to distribute his machines outside of his geographical area, and also provide training to customers, Singer began selling licenses to entrepreneurs in different parts of the country.&nbsp;

Franchising is as "an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures". The person offering the franchise is known as the franchisor. The franchisee is the person who purchases the franchise and is given the opportunity to enter a new business with a better chance to success than if he or she were to start a new business from scratch. Foundation of this relationship is the Franchise Agreement. A franchise agreement is the legal document that binds the franchisor and franchisee together. This document explains what the franchisor expects from the franchisee in running the business.

External expansion refers to business combination where two or more concerns combine and expand their business activities. In the process of combination, two or more units engage in similar business or related process or stages. Sometimes stages of the same business join with a view to carry on their activities or shape, their polices on common basis some other or in coordination for mutual benefit or maximum profits. The combination may be among competing units or units engaged in different processes. After combination, the constituted firm pursues some common objectives or goals.&nbsp;

Following are the disadvantages of franchising to the franchisee: Right and the only way of doing things:&nbsp;Degree of freedom for the franchise gets limited. There is over guidance and over-influenced degree of control over them. This leaves no scope for the innovation. Continuing cost implication:&nbsp;Revenue gets shared with the franchisor. This is in addition to the royalty and the fees. Additional amounts can be charged towards sharing the cost for advertising, training, etc. It may become an expensive business due to tendency of exploitation by the parent firm. Risk of franchisor getting bought:&nbsp;The franchisee faces irreversible changes in form of problems and difficulties when the franchisor either fails or goes for merger. &nbsp;Inability to provide services:&nbsp;When promises made in the agreement are not kept, the franchisee are left without any support in important areas.

A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name. In a&nbsp;<a href="https://www.investopedia.com/terms/m/merger.asp">merger</a>, the boards of directors for two companies approve the combination and seek shareholders' approval. Post merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 1998 a merger deal occurred between Digital Computers and Compaq, whereby Compaq absorbed Digital Computers. Compaq later merged with Hewlett-Packard in 2002.

Internal expansion results from the gradual increase in the activities of the concern. The concern may expand its present production capacity by adding more machines or by replacing old machines with the new machines with higher productive capacity. The internal expansion can also be undertaken by taking up the production of more units or by entering new fields on the production and marketing sides. Internal expansion may be financed by the issue of more share capital, generating funds from old profits or by issuing long–term securities.&nbsp;&nbsp;

Hostile acquisition: A bigger company creates an atmosphere where in a smaller company is forcefully made to accept the acquisition to save itself. If the smaller company does not accept the acquisition, the bigger company buys off all of its shares. The bigger company thus becomes a major stake holder and then start the acquisition process.

Market extension merger:&nbsp; This occurs between two firms that are offering the same products but in different market regions. The motive behind this type of merger is to make sure that the merging companies will be able to operate in a bigger market and there by getting huge number of clients.

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The Structure of Mergers Mergers may be structured in multiple different ways, based on the relationship between the two companies involved in the deal.

Reverse acquisition: A private company acquires a public company.

Leadership: Strong leaders adds to the success in value chain management. Good leaders earn the respect of their employees through neutral, effective and sound management practices. Conflict management, motivation and direction are the essential requirements of strong leaders. Employee/human resources: Without a knowledgeable and active human resources department, employees may feel they don’t have a voice within the company and this may lead to lack in belongingness from the employees. Also, an employee hesitant to go directly to the ultimate superiors with issues act as a hurdle in many situations. Organisational culture and attitudes: Organisations that foster strong cultural identity with positive attitudes tend to attract and retain top employees. Regular sponsored activities are suggested to help build cultural unity and keep attitudes positive while boosting productivity of the firm.

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Infrastructure Infrastructure covers a company's support systems and the functions that allow it to maintain operations. This includes all&nbsp;<a href="https://www.investopedia.com/video/play/accounting/">accounting</a>, legal, and administrative functions. A solid infrastructure is necessary for all primary functions. Technological Development Technological development is used during research and development and can include designing and developing manufacturing techniques and automating processes. This includes equipment, hardware, software, procedures, and technical knowledge. Overall, a business working to reduce technology costs, such as shifting from a hardware storage system to the cloud, is technological development.

Capital requirements: (a) The franchise offers an opportunity to start a new venture with up-front support that could save the entrepreneur’s significant time and huge investment of capital. They also provide initial investment to start operation. (b) Some franchisors conduct location analysis and market research of the area which include an assessment of traffic, demographics, business condition and competition. Knowledge of the market: (a) Any established franchise business offers the entrepreneur years of experience in the business and knowledge of the market. (b) Competition, media effectiveness, and tastes can vary widely from one market to another. Given their experience, franchisors can provide advice and assistance in accommodating any of these differences. Operating and structural controls:&nbsp;Two main problems that generally an entrepreneur face during the start-up: (a) Maintaining quality control of products and services. (b) Establishing effective managerial controls. These controls are usually outlined in manual supplied to the franchisee upon completion of the franchise deal.&nbsp;

Marketing and Sales Strategies to enhance visibility and target appropriate customers—such as advertising, promotion, and pricing—are included in marketing and sales. Basically, this is all activities that help convince a consumer to purchase a company’s product or service. Continuing with the above example, an e-commerce company may run ads on Instagram or build an email list for email marketing.

The requirements for value chain&nbsp;management.

Different Types of Value Added Quality Added Value:&nbsp;It is adding convenience, ease of use, etc. that customers value. For example, turning a commodity into a branded product or design enhancements. Environmental Added Value:&nbsp;It is value added which employs methods or systems that do not harm the environment. For example, using less fuel, using recycled material for packaging. Cause-related Added Value:&nbsp;Here, the business contributes part of the revenue from a commodity to a cause. For example, a business may donate a percentage of revenue from each transaction to a orphanage. Cultural Added Value:&nbsp;It uses methods or systems of production involving cultural aspects. For example, using a combination of English and the regional language in written communications.

Product extension merger:&nbsp; This type of merger occurs between two companies that offer the products that are related to each other and operating in the same market. The merger helps to group the products together and reach a huge client base. It increases the profit margins too.

A historic example of a product extension merger was the acquisition of Pizza Hut by Pepsi Co in 1977. Pepsi understood that lots of people went to Pizza Huts, and that by merging with them, Pepsi would be able to reach a much wider market.

ENTERPRISE GROWTH STRATEGIES&nbsp;

Porter’s Value Chain Primary Activities Inbound Logistics Inbound logistics include the receiving, warehousing and inventory control of a company's&nbsp;<a href="https://www.investopedia.com/terms/r/rawmaterials.asp">raw materials</a>. This also covers all relationships with suppliers. For example, for an e-commerce company, inbound logistics would be the receiving and storing products from a manufacturer that it plans to sell.

FRANCHISE EXAMPLES

MERGERS AND ACQUISITIONS

Porter breaks value chain analysis into five primary activities. Then, he further breaks those down into four activities that help support primary activities. The primary activities of Michael Porter's&nbsp;<a href="https://www.investopedia.com/terms/v/valuechain.asp">value chain</a>&nbsp;are inbound logistics, operations, outbound logistics, marketing and sales, and service. The goal of the five sets of activities is to create value that exceeds the cost of conducting that activity, therefore generating a higher&nbsp;<a href="https://www.investopedia.com/terms/p/profit.asp">profit</a>. Here are the five key primary activities.

Manufacturing Franchise Opportunity:&nbsp; It provides an organisation with the right to manufacture a product and sell it to the public, using the franchisor’s name and trade mark. Business Franchise Opportunity Ventures:&nbsp; Here, a business owner purchases and distributes the products for one specific company. The company provides customers or accounts to the business owner. In return, the business owner pays a fee as compensation. Business Format Franchise Opportunity:&nbsp; Here, a company provides a business owner with a proven method for operating a business using the name and trade mark of the company. The company provides a significant assistance to the business owner in starting and managing the company. The business owner pays a fee or royalty in return.

Porter's Value Chain Secondary Activities Now, companies can further improve the primary activities of their value chain with secondary activities. Value chain support activities do just that, they support the primary activities. The support, or secondary, activity generally plays a role in each primary activity. Such as human resource management, which can play a role in operations and marketing and sales. Here are the four supporting activities.

Porter’s Generic Value&nbsp;Chain&nbsp; Michael Porter gave the value chain analysis concept in his 1985 book ‘The Competitive Advantage’. He suggested that activities within an organisation add value to the service and products that the organisation produces and all these activities should be run at optimum level if the organisation is to gain any real competitive advantage. If these activities are run efficiently, the value obtained exceed the costs of running them and customers return to the organisation and transact freely and willingly. He suggested that the organisation is split into ‘primary activities’ and ‘support activities’.

Coordination and collaboration: It is essential to increase efficiency within an organization. Care should be taken that efforts are not duplicated. Firm is greater than the sum of its parts for achieving a common goal of the firm. Technology investment: With outdated technology, like old computers or machinery, an organization’s competitiveness is weakened due to a loss in productivity. This devoid the firm from gaining advantage. Organisational process: Improvement in processes through better technology and greater procedural knowledge is essential for the present and future success of a company. Continuity is to be maintained for the improvement and is to be made an integral part of the system.

TYPES OF FRANCHISING Product Franchise Business Opportunity: Here, the manufacturers use the product franchise to govern how a retailer distributes their products. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows the owner to use the name and trademark owned by the manufacturer. The store owner purchases the inventory in return for these rights.&nbsp;

Types of Franchising

Operations Operations include procedures for converting raw materials into a finished product or service. This includes changing all inputs to ready them as outputs. In the above e-commerce example, this would include adding labels or branding or packaging several products as a bundle to add value to the product.

Outbound Logistics All activities to distribute a final product to a consumer are considered outbound&nbsp;<a href="https://www.investopedia.com/terms/l/logistics.asp">logistics</a>. This includes delivery of the product but also includes storage and distribution systems and can be external or internal. For the e-commerce company above, this includes storing products for shipping and the actual shipping of said products.

How franchising helps start-ups? Working:&nbsp;Franchising changed the working of the start-ups because already the product carriers a name in the market already. The start-ups pay royalty to the franchisor. Start-ups save struggling time and money involved in the process. &nbsp; Training:&nbsp;Start-ups take up training to understand the product. Franchisors make franchises fully known with the product/services. Start-ups are the sales person. And franchisors charge a fee for this purpose. &nbsp; Fast growth:&nbsp;The start-ups can grow fast without having to increase cost through increasing labour, operating costs, etc. because normally buyers straight away contact them. One plus one eleven:&nbsp;Franchises work for the benefit of franchisors&nbsp;i.e. they turn up one plus one eleven. Both are open to help each other. Franchisors’ efforts to boast their franchises are always real and sincere. No clash of interest arises.

Services This includes activities to maintain products and enhance consumer experience—customer service, maintenance, repair, refund, and exchange. For an e-commerce company, this could include repairs or replacements, or&nbsp;<a href="https://www.investopedia.com/terms/w/warranty.asp">warranty</a>.

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External Growth External growth (also known as inorganic growth) refers to growth of a company that results from using external resources and capabilities rather than from internal business activities. External growth is an alternative to internal (organic) growth.&nbsp;

Franchising - Quiz

Procurement <a href="https://www.investopedia.com/terms/p/procurement.asp">Procurement</a>&nbsp;is the acquisition of inputs, or resources, for the firm. This is how a company obtains raw materials, thus, it includes finding and negotiating prices with suppliers and vendors. This relates heavily to the inbound logistics primary activity, where an e-commerce company would look to procure materials or goods for resale. Human Resource Management Hiring and retaining employees who will fulfill business strategy, as well as help design, market, and sell the product. Overall, managing employees is useful for all primary activities, where employees and effective hiring are needed for marketing, logistics, and operations, among others.

Advantages to the franchisee: Product acceptance:&nbsp;The franchisee usually enters into a business that has an accepted name, product or service. Example: In case of Subway, (a) Any person buying a franchise will be using the Subway name, which is well known and established throughout the United States. (b) The franchisee does not have to spend resources trying to establish the credibility of the business. It already exists based on past performances from how long the franchise exist. Management expertise: (a) Franchisee always get the advantage of managerial assistance provided by the franchisor. (b) Special training programme and education provided by them on all aspects of operating the franchise like classes in accounting, personnel management marketing and production. Example: McDonald’s, for example, requires all its franchisees to spend time at its school, where everyone takes classes in these areas.&nbsp;