Business Expansion aqa

Reasons why businesses grow

• Many firms start small and go on to grow into large companies or even multi-national corporations (Amazon started in a garage)

• Growth can involve a business changing its form of legal ownership

  • E.g. A sole trader looking to grow may seek a partner, while a private limited company may pursue flotation to become a public limited company

Reasons why businesses grow

• In some cases, a business may look to become smaller

  • Retrenchment involves a business scaling down its operations as it evolves and can involve

    • Reducing the size of the workforce

    • Closing less profitable outlets

    • Exiting existing markets

  • Retrenchment can help a business reduce costs and is particularly relevant for businesses whose objective is to survive

Organic growth

• Business growth can be achieved by growing organically, or inorganically (mergers and takeovers)

• Organic growth is driven by internal expansion using reinvested profits or loans

  • Organic growth is usually achieved by

    • Gaining a greater market share

    • Product diversification

    • Opening new outlets

    • Franchising

    • Outsourcing production to other trusted businesses

    • International expansion (new markets)

    • Investing in new technology/production machinery

    • Using e-commerce

Examples of organic growth

• Product diversification opens up new revenue streams for a business

  • Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream

• Franchising is a method of organic growth where a business sells the rights to operate its business model, including its branding, to business owners called franchisees

  • Brand recognition can grow quickly, as franchisees take on the responsibilities and financial risks of opening and operating new outlets

  • Business income is generated from the payment of an initial lump sum plus ongoing fees

  • The franchisee operates the business under the franchisor’s established system and usually receives training, marketing support, and ongoing assistance

    • Examples of businesses that have achieved growth through franchising include Domino’s Pizza, KFC and Burger King

  • The disadvantages of franchising as a method of growth include

    • The franchisor loses some control over the operation of branded outlets

    • Should one franchisee fail to meet customer expectations of the brand, the whole business can be negatively affected

  • Increasingly, businesses use e-commerce to sell greater volumes of goods and services without the need to operate or expand physical stores

    • E-commerce can provide access to a large number of customers, potentially on a global scale

    • However, it must establish effective means of distribution to avoid customer dissatisfaction

Advantages and disadvantages of internal (organic) growth

Inorganic (external) growth

• Inorganic (external) growth involves integrating with one or more other businesses through mergers or takeovers

  • A merger occurs when two or more companies combine to form a new company

    • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity

  • A takeover occurs when one company purchases another company, often against its will

    • The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations 

• There are several reasons why companies may choose to grow through mergers or takeovers

Reasons for takeovers and mergers

• Strategic fit

  • A company may acquire another company to expand into new markets, diversify its product offerings, or gain access to new technology

  • E.g. in 2010 Kraft Foods purchased Cadbury’s to increase its product offering and expand business sales in the United Kingdom

• Lower unit costs

  • Larger companies are able to achieve lower unit costs as they receive many benefits from being large

  • E.g. bulk purchase discounts on supplies and better interest rates from banks on loans

• Synergies

  • Synergies are the benefits that result from the combination of two or more companies

  • E.g. increased revenue, cost savings, or improved product offerings

• Elimination of competition

  • Takeovers are often used to eliminate competition, and the acquiring company increases its market share

  • E.g. Meta, the parent company of Facebook purchased WhatsApp in 2014 and continued to run the messaging service alongside their own Facebook Messenger

• Shareholder value

  • Mergers and takeovers can also be used to create value for shareholders

  • By combining companies, shareholders can benefit from increased profits, dividends and higher share prices

Types of inorganic growth

• Businesses join together in one of three ways

  • Vertical integration

  • Horizontal integration

  • Conglomerate integration

• Vertical integration involves a business merging with or taking over another firm in the supply chain or at a different stage of the production process

Vertical integration

• Forward vertical integration involves a merger or takeover with a business further forward in the supply chain

  • E.g. A dairy farmer merges with an ice cream manufacturer

• Backward vertical integration involves a merger or takeover with a business further backwards in the supply chain

  • E.g. An ice cream retailer takes over an ice cream manufacturer

Advantages and disadvantages of vertical integration

• Horizontal integration involves a business merging with or taking over a business at the same stage of the production process

  • E.g An ice cream manufacturer buys another ice cream manufacturer

Advantages and disadvantages of horizontal integration