1.7 Expanding a business

Question 1

Methods of growth

Answer 1

• Internal/organic
• External

Question 2

Types of organic growth.

Answer 2

• Franchising
• Outsourcing
• New stores
• E-commerce

Question 3

Advantages of franchising for the franchisor.

Answer 3

• Regular flow of income from franchisees.
• Risk shared with franchisees
• Expansion paid for by franchisees
• Rapid growth of franchise is possible.
• Franchisor can retain high level of control.

Question 4

Disadvantages of franchising for the franchisor.

Answer 4

• Reputation may be adversely affected by franchisees.
• Can be expensive to monitor and supply franchisees.
• Profit from franchisor’s idea is shared with franchisees.

Question 5

Advantages of franchising for the franchisee.

Answer 5

• Everything is already set up for you, increasing chances of success.
• You don’t have to struggle/spend money to create a new name/image.
• The business reputation is already there so it’s easier to get customers
• Get free training and equipment, reducing costs.
• Staff are easy to get since the business is known.

Question 6

Disadvantages of franchising for the franchisee.

Answer 6

• Limited freedom in making decisions that may appeal to local customers more.
• Cannot make changes to brand image/name.
• Have to pay royalty payments and upfront fee is expensive.

Question 7

Types of external growth.

Answer 7

• Mergers
• Takeover

Question 8

Economies of scale

Answer 8

When average unit costs decrease as output increases.

Question 9

Types of economies of scale.

Answer 9

Purchasing: when established businesses bulk-buy to get discounts, decreasing the costs associated with the supply bought.
Technical: when established businesses introduce advanced technology into their business which increases efficient production, decreasing ACPU.

Question 10

Importance of economies of scale

Answer 10

Economies of scale lowers average unit cost per unit, so the business can lower their prices which is useful in a competitive market (helps them become more competitive).

Question 11

Diseconomies of scale

Answer 11

When average unit costs increase as output increases.

Question 12

Reasons why diseconomies of scales occurs.

Answer 12

• Poor communication - misunderstanding, delays and errors due to more complex communication channels.
• Poor coordination - inefficiencies, delays and communication breakdown due to business organisation becoming more complex.
• Lack of staff motivation - productivity and efficiency decline leading to more mistakes and higher unit costs.

Question 13

Average unit costs

Answer 13

Average unit cost = total cost / output.