BusinessStudies.net - GCSE Revision for AQA Business Studies

1.7 Expanding a Business

Expanding a business can bring big benefits, but comes with big risks! There are several different ways a business can expand.

Organic vs External Expansion

Organic Growth

Achieved when the business grows through its own activies.

Types of organic growth:

  • Internal expansion
  • Franchising

External Growth

When a business takes over, or merges with, another business.

Types of external growth:

  • Horizontal integration
  • Vertical integration
  • Conglomerate integration

Organic Growth: Internal Expansion

Growth is achieved by the expansion of the businesses own activities.

These could include: opening new stores, adding new product lines, increasing production, opening an online store, or outsourcing (paying another firm to do tasks on its behalf).

Advantages
Disadvantages

Organic Growth: Franchising

A business (franchisor) grants the rights to another business (franchisee) to operate a business using its established brand, products, and processes.

The franchisee pays a fee, plus a percentage of their revenue or profit, to the franchisor.

Most large fast-food companies use franchising.

Advantages
Disadvantages

External Growth: Horizontal Integration

One firm joins with another firm at the same stage of the same production process, often a competitor.

Allows greater control of the market.

Example: In 2013, Coca Cola purchased 90% of Innocent smoothies.

External Growth: Vertical Integration

There are two types of vertical integration: forward and backward.

Forward Vertical Integration

Illustration of backward vertical integration

Backward Vertical Integration

Illustration of backward vertical integration

External Growth: Conglomerate Integration

One firm joins with another firm from a different market.

This can be an attempt to reduce the risks of relying on just one market, or to expand into new markets.

Example: The Walt Disney Company merged with the American Broadcasting Company in 1995. This allowed Disney access into the broadcast television industry.

Takeovers and Mergers: Risks

Economies of Scale

Increasing production volumes can reduce the cost per unit. This is called economies of scale.

Reducing costs, but maintaining the selling price, will increase profit.

Alternatively, the business might reduce the selling price to undercut competitors and sell more, which can also increase profit.

Purchasing Economies of Scale

Technical Economies of Scale

Diseconomies of Scale

Growth can also bring additional costs. Increasing production volumes can increase the cost per unit.

GCSE Business Studies revision quiz