Business Expansion (AQA GCSE Business)
Revision Note
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
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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
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Apple |
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Disney |
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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 & Disadvantages of Internal (Organic) Growth
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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
Diagram: Reasons for Takeovers and Mergers
Businesses integrate with other businesses for a range of reasons, including synergies, lowering costs and strategic fit
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
Diagram: Vertical Integration
A business can grow by integrating with another firm in the supply chain or at a different stage of the production process
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 & Disadvantages of Vertical Integration
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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 & Disadvantages of Horizontal Integration
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Conglomerate Integration involves a business taking over or merging with an other, unrelated, business
Businesses use this type of integration to spread risk across more than one market
E.g. Online retailer Amazon's takeover of Whole Foods supermarket in 2017 is an example of conglomerate integration, as Amazon had no presence in the grocery market before this time
Benefits & Drawbacks of Expansion
Business expansion has a number of benefits and drawbacks
Benefits & Drawbacks of Expansion
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Examiner Tip
In the exam, you could be asked to recommend whether a business should take over or merge with another. To achieve top marks in these 9-mark questions, you need to make sure your answer:
Has a sustained line of reasoning, which weighs up both sides of the argument
Is coherent and relevant, making use of the question stem
Is substantiated, with suitable references made to the business context
Has a focused conclusion that fully answers the question
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