Business - Unit 2…read more

Reasons for expanding a business:
Reason Benefits Risks
To increase sales. Increased profit. Profit won't increase if the
business has had to lower
prices too low in order for
more sales.
To increase market share. Retailers will be more Other firms could be
prepared to stock the increasing sales at a faster
products of the business. rate ­ lead to fall in market
share.
Take advantage of Reduces the cost of More difficult to manage a
economies of scale. producing a product. large business ­ could
increase costs.
Become more secure and It is thought that large Large businesses can make
benefit from customers businesses are more secure losses and be forced out of
preferring to deal with so customers often to prefer business still.
large businesses. to deal with them.
Economies of scale: the reasons why average costs of each item fall as a firm expands.…read more

Reasons for not expanding a business:
· To keep control (more managers needed if
business is larger.)
· To offer a personal service to customers (if
expands won't get to deal with every
customer.)
· To avoid too much risk (more money needed
to expand ­ more to lose.)
· To avoid increased worry and workload.…read more

Organic (internal) Expansion:
· Expansion within the business.
· Could be achieved by:
­ Opening new branches/offices/factories etc.
­ Offering franchises.
­ Sell online using the internet.
Method Advantage Disadvantage
New Slow and steady ­ less risk. Market share could fall if other
branches Easier to manage and control. businesses are expanding too.
Too slow for some owners ­ can
take a long time to make a profit.
Franchising Cheap for the franchiser as Franchisee keeps most of the profit.
franchisee pays for most. No control over franchisee could act
Franchisees will want to make the poorly and business will suffer.
business successful.
Internet Follows advances in technology. More competitive prices.
growth Means there is no need for a store Some customers prefer to interact
­ expensive to set up and run. face to face and try before they buy.…read more

Inorganic (external) Growth:
· Can be achieved by either a merger or takeover.
Vertical backward: joining
two businesses in the same
Diversification: joining
Diversification: `D' ­ industry but different stages
two businesses in
different. of production towards the
different industries. E.g.
Horizontal: straight supplier. E.g. Building firm
An insurance company
line ­ same and brick works
with a bakers.
Vertical backward:
`backward' going
backwards in the stage Horizontal: joining two
of production. businesses in the same
Vertical forward: going industry and stage of
forward in the stage of production. E.g. Two
production. hairdressing businesses.
Vertical forward: two businesses in the
same industry but different stages of Diagram of different
production towards the customer. E.g. types of integration
Farmer buying a food shop. for businesses.…read more

Benefits/Disadvantages of Inorganic Growth:
Benefits:
Horizontal -Can lead to increase in market share.
- Reduces competition.
- Economies of scale are more likely.
Vertical Backward - Offers reliable supplies of materials.
Vertical Forward -Offers a reliable outlet for the products to be sold.
Diversification - Spreads risk over more than one industry.
Disadvantages:
- Can be expensive to take over another business. (Often requires selling
more shares or taking out a loan.)
- May be problems managing and controlling a much larger business.
- With vertical and diversification integration management might lack
experience of these others businesses, the products they sell and the
markets they sell in.…read more