Expanding a business

• Expansion


  Increasing the size of a business in terms of sales, value, or number of employees
• Benefits of expansion


  • Economies of scale
  • More power in the market
  • Increased status and reputation will make it easy to launch new products
  • Staff may be rewarded, which will increase motivation
  • More money
• Drawbacks of expansion


  • Slower decision making and communication as the hierarchy grows
  • Messages may become distorted
  • Employees may become demotivated as they feel less important to the business
  • The business becomes harder to manage as it may be based in a number of different locations
• Internal (organic) growth


  Business growth that occurs from within the business
• External (inorganic) growth


  Business growth that occurs through acquiring or merging with other businesses
• Economies of scale


  Where the average costs (of production, distribution and sales) fall as the business increases the amount of product that it produces, distributes and sells
• Unit cost


  The average cost of making one product
• Bulk-buy discount


  A cheaper price offered to customers when they buy a large quantity of something
• Purchasing economies of scale

  • As a business gets bigger, it is able to buy in bulk and be given bulk-buy discounts which will reduce the unit cost of each product
• Technical economies of scale

  • As a business gets bigger it can purchase more advanced machinery and equipment, and larger buildings to produce more, which reduces unit costs and increases profit per unit
• As unit costs fall

  The firm will make more profit per unit
• As unit costs fall

  The firm can reduce their selling price to make themselves more attractive to potential customers without losing profit
• Diseconomies of scale


  When average unit costs begin to increase, often as a result of business growth
• Diseconomies of scale


  • Caused by problems with communication as the firm expands possibly into different locations or internationally
  • Caused by coordination issues as managers are in charge of increasing numbers of employees
  • Can lead to reduced staff motivation and lower productivity, which increases unit costs
• Calculating average unit costs


  Unit costs = total costs ÷ output
• As a business increases production

  Unit costs decrease, showing economies of scale
• Internal (organic) growth


  When a business expands from within, e.g. expanding its product range, increasing the number of its business units or adding new locations
• As a business further increases production

  Unit costs increase, showing diseconomies of scale
• Franchising


  • A business gives the right to another person or business to sell goods or services using its name, in return for a fee and royalties
  • Franchisee is someone who purchases a franchise and uses an established brand name and products
  • Franchisor sells a franchise in return for a fee and royalties
• Opening new stores


  • Businesses must be able to find a suitable location and have access to enough finance
• 1. commerce


  • Selling products online, provides a much larger market and ability to make sales at any time, but can be expensive to set-up and manage
• Outsourcing


  • A business pays another firm to produce its products, allows for quick capacity increase with minimal investment, but business loses control and reputation could be damaged
• Merger


  Two businesses join to form a new, larger business
• Takeover


  An existing business expands by buying more than half the shares of another business
• Merger example


  • Business A and business B want to expand but do not feel they can get any bigger alone, so they decide to come together and share their business locations, stock, marketing, products and staff
• Takeover example


  • Business A decides they want to grow but the area they want to grow into is already occupied by a similar or smaller business, so Business A decides to buy over 50% of the shares in another business to take control
• Methods of merger and takeover

  • Horizontal integration
  • Forward vertical integration
  • Backward vertical integration
  • Diversification (conglomerate integration)
• Horizontal integration


  • Two competitors join through a merger or takeover, the new business becomes more competitive and increases its market share, giving it more control when negotiating and setting prices
• Backward vertical integration


  • A business takes control of a business earlier in the supply chain
• Forward vertical integration


  • A business takes control of a business that operates at a later stage in the supply chain
• Diversification (conglomerate integration)


  • Businesses in unrelated markets join together through a takeover or merger, enabling businesses to spread their risk over a wider range of products and services
• Advantages of external (inorganic) growth

  • Reduced competition
  • Market share can be increased quickly
  • Potential for economies of scale
• Disadvantages of external (inorganic) growth

  • It can be expensive to takeover or merge with another business
  • Managers may lack the experience to deal with the other business
  • There may be culture clashes which lead to diseconomies of scale