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).
- Inexpensive compared to other methods of expansion (e.g., buying another business)
- Slow growth allows the business to ensure quality is maintained
- Can be very slow
- There are still costs involved
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.
- Can enable very rapid growth without significant costs and risk to the franchisor
- Increases brand awareness among customers
- Must ensure franchisees maintain quality and standards
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
- A firm joins with its distributor or customer
- Gives greater access to customers and allows greater control of the product’s image / brand
- Example — a factory buying the retailer which sells its products
Backward Vertical Integration
- A firm joins with its supplier
- Gives control over cost and quality of supplies
- May prevent supply to competitors
- Example — a factory buying the company which provides the chemicals it uses.
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
- Can be very expensive — enough shares to control the business will need to be bought
- Duplicated resources (e.g., each company has its own HR department) mean redundances are common
- Firms can disagree about how the business is run
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
- Businesses get a "bulk discount" for buying higher volumes of supplies
- This reduces the cost of making each unit
Technical Economies of Scale
- The business invests in machines and processes which make production more efficient
- This saves money by reducing waste, or allowing faster production
Diseconomies of Scale
Growth can also bring additional costs. Increasing production volumes can increase the cost per unit.
- Bigger businesses need more staff to manage a bigger workforce or maintain more equipment
- Large, complex organisations can become inefficient due to communication and decision-making problems
- If staff feel insignificant, they can become demotivated and reduce productivity
1.6b Basic Financial Terms
Home
