Expanding a Business

• expansion:


  the process of increasing a business' size
• business size can be measured in:

  -sales

  -value

  -number of employees
• expansion advantages:

  -economies of scale

  -more power in the market

  -increased status and reputation

  -staff rewards (increase motivation)

  -more money
• expansion disadvantages:

  -slower decision making/communication as hierarchy grows

  -distorted messages

  -employee demotivation

  -difficult to manage in multiple locations
• economies of scale:

  -the cost advantage of producing on a large scale

  -as output increases the unit cost decreases
• unit cost =

  total cost/output
• diseconomies of scale:

  when a business grows too large, leading to a possible increase in unit cost
• diseconomies of scale causes:

  -communication issues (expansion over multiple locations)

  -manager coordination issues (more employees=reduced staff motivation + reduced productivity)
• organic growth:

  a business grows by increasing its output, by increasing its customer base or by developing new product
• methods of internal growth:

  -franchising

  -opening new stores

  -e-commerce

  -outsourcing
• franchising:

  -the sale of the rights to use/sell a product by a franchisor to a franchisee

  -a fixed fee and/or a percentage is paid in return

  -the franchiser specifies the standards and provides training and support
• business -> franchisor


  -pay a fee
• franchisor -> business


  -use a business name

  -use business products

  -training

  -marketing

  -equipment
• franchise advantages:

  -already using established business (easier to profit)

  -allows for rapid growth

  -don't pay for marketing
• franchise disadvantages:

  -loss of decision making control

  -lower levels of profit

  -expensive to set up

  -expensive to manage
• e-commerce advantages:

  -wider market

  -24/7 sales
• e-commerce disadvantages:

  -expensive to set up

  -expensive to manage
• outsourcing:

  contracting another business to carry out some of the business' activities, often to reduce costs
• outsourcing advantages:

  -increase business capacity

  -minimal investment
• organic growth advantages:

  -maintain businesses own values

  -lower risk

  -higher production = economies of scale = lower average costs
• organic growth disadvantages:

  -return on investment could take a while

  -slower growth

  -limited growth (dependant on reliability of sales forecasts)
• inorganic growth:


  the growth of a business by joining with another by merger or takeover
• merger:

  when two or more businesses agree to join together
• takeover:

  one business takes control of another by buying the majority of shares
• horizontal integration:

  a) two competitors join (m/t)

  b) the new business becomes more competitive + increases its market share

  c) more control over setting and negotiating prices
• forward vertical integration:


  a business takes control over a business that operates at a later stage in the supply chain
• backward vertical integration:

  a business takes control over a business that operates at an stage in the supply chain
• diversification: (conglomerate integration)

  a) businesses in unrelated markets join

  b) business spreads over a wider range of products and services
• inorganic growth advantages:

  -reduced competition

  -increased market share

  -potential for economies of scale
• inorganic growth disadvantages:

  -expensive to takeover/merge

  -managers may lack experience in other businesses areas

  -may be culture clashes (diseconomies of scale)