Strategy and implementation – business growth

Question 1

Organic growth

Answer 1

internal growth, is the expansion of the business by selling more of its products.

Question 2

organic growth strategies

Answer 2

Expanding the product range

targeting new markets

Expanding the distribution network

Benefiting from economies of scale

Question 3

External growth

Answer 3

External growth is achieved in two ways, takeover or merger

Question 4

takeover

Answer 4

acquisition of one business by another, either on an agreed or hostile basis

takeover will take place when a business sells more than 50% of its shares.

PLC are vulnerable as shares are bought and sold on the stock market.

LTD are less open to takeovers, especially hostile takeovers, as shareholders have to invite and agree to the selling of their shares.

Question 5

merger

Answer 5

two companies become one

businesses are of equal size and will agree on the share ownership of the new business

Question 6

Types of mergers and takeovers

Answer 6

Backward vertical integration
Conglomerate integration
Horizontal integration
Forward vertical integration

Question 7

Horizontal integration

Answer 7

when a business merges with or takes over another in the same industry at the same stage in the production process

Question 8

Backward vertical integration

Answer 8

when a business merges with or takes over another business at the previous stage in the production process within the same industry.

Question 9

Forward vertical integration

Answer 9

when a business merges with or takes over another business at the next stage in the production process.

Question 10

Conglomerate

Answer 10

when a business merges with or takes over another business with no connection to the product or the market

Question 11

Wider effects of mergers and takeovers

Answer 11

change of executives
some redundancies.
job losses
may affect morale and result in a workforce that is demotivated.

Question 12

Reasons for mergers and takeovers

Answer 12

• Access to new markets – especially overseas
• Increased market share leading to increased market power in the market
• Diversification
• Acquiring new products and technology.

Question 13

franchise

Answer 13

legal right to use the brand name, products and business style of an existing business

Question 14

What is franchising?

Answer 14

granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor.

Question 15

advantages to both franchisors and

franchisees

Answer 15

• You don’t have to come up with a new idea - someone else has had it and tested it too!
• Larger, well-established franchise businesses will often have national advertising campaigns and a solid trading name
• Good franchise businesses will offer comprehensive training programmes in sales and, indeed, all business skills
• Good franchise businesses can also help secure funding for your investment

Question 16

Who is in control?

Answer 16

Each franchise business outlet/unit is owned and operated by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.

Question 17

What are the cost implications?

Answer 17

franchisor will receive an initial fee from the franchisee with ongoing management service fees - usually based on a percentage of annual turnover or mark-ups on supplies.

In return, franchisor has an obligation to support the franchise network, notably with training, product development, marketing and advertising, promotional activities and with a specialist range of management services.

Question 18

advantages from the franchisor

Answer 18

• Fast growth – with lower risk. The franchisee finances the growth. Franchisees have to pay the franchisor for
the right to join the franchise
• Economies of scale can happen quickly; the franchisor now is involved in bulk buying for the franchises
• Increased income from franchise fees, this includes upfront payments and on-going royalty payments
• The franchisees who are committed to the success of the business and are likely to be hardworking, helping to give a greater chance of successful growth

Question 19

problems with using the franchise model of growth

Answer 19

• Loss of control – franchisees may be harder to manage than appointed managers
• Not all profits return to the franchisor, representing an opportunity cost
• Potential loss of reputation if franchisors act unprofessionally
• Growth may occur too quickly, with the possibility of diseconomies of scale.