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The business organisation 6:
Reasons, benefits and risks of expanding a business:
To increase sales ­ this should lead to an increase in profits ­ profits will not increase if the
business has had to lower its prices too much in order to sell more.
To increase market share ­ if the sales of the business grow faster than total sales in the
market its share of this market will increase. This means that retailers would be much more
prepared to stock the products of this business- if other firms are increasing sales at an even
faster rate than market share will fall.
Take advantage of economies of scale- if it is possible to reduce the costs of each item
produced as a business grows then is benefitting from economies of scale. E.g. buying
material in large quantities leading to bulk discounts-it is often much more difficult to manage
a large business and this could increase costs of each item produced.
Become more secure and benefit from some customers preferring to deal with large
businesses- it is widely thought that large businesses are more secure than smaller ones.
Some customers think that such businesses will be around for the lifespan of the products
they are buying- large businesses can make losses and be forced out of business too.
Reasons for not expanding:
To keep control - large businesses often need to recruit managers to make decisions.
To offer a personal service to customers- owner no longer knows the customers individually.
To avoid too much risk ­expansion means putting more money into the business
To avoid increased worry and work load.
Organic growth ­ opening new branches:
Slow and steady- organic growth is less risky than taking over or merging with another
business. The managers can manage this form of growth more easily.
Often paid for from profits- usually organic growth does not need loans or sale of shares to
pay for it. This will reduce the chances of either having to pay interest or lose control by
selling shares.
Easier to manage and control ­ when a business expands rapidly by merging with or taking
over another business. This sudden expansion can be very difficult to handle. With slower
organic growth important decisions can be taken by management with the time to consider
all the risks and benefits carefully. Also the managers will have experience of the market it
operates in ­ this is always not the case with in organic growth.
However this method also has its disadvantages:
Too slow for some owners ­ it can take several years to double the size of some
businesses. A merger or takeover could achieve this overnight.
Market share could fall ­ if other businesses are expanding more quickly market share will
No gains from integrating with another business.

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Benefits of expanding a business by selling franchises:
Business growth is paid by the franchisee paying fees to use the name and logo of the
existing firm. The franchise fee can be an important source of finance for the business.
Franchisees are likely to have a high incentive to expand their business quickly.
The management problems of each franchised outlet do not have to be dealt with by the
original business.…read more

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Customers ­ prices may be lower. The larger firm can benefit from economies of scale if it
can insist on lower prices from suppliers ­ prices could rise. With a merger or takeover there
might be fewer competitors so the business could raise prices.
Suppliers ­ more orders might be received from the larger business ­ the expanding
business may insist on lower prices from suppliers as it is now a more important customer.…read more

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Has more status than a sole trader or partnership. Some customers and suppliers will have
more confidence in the business as it has a clear legal identity.
Attracts private investors known to the owners to buy shares in it by giving them limited
Original owners often remain as directors and senior managers so they will continue to run
the business.
Limited liability for all shareholders unlike the unlimited liability faced by sole traders or
partners in a partnership.…read more

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Increasing shareholder value ­ this is a common objective of public limited companies. The
directors will want to keep their jobs by keeping shareholders happy. Increasing shareholder
value means share price rises over time ­ increased dividends can be paid out to
Managerial objectives - in large public limited companies the thousands of shareholders
appoint directors to control the business. These senior managers are not the owners of the
business they may own some shares but not the majority of them.…read more

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Cost of sites- sometimes the more expensive a site the more profitable it is.
Labour costs ­ should relocate somewhere cheaper unless a firm needs high income
consumers e.g. high quality chocolates.
Transport costs and proximity suppliers
Sales potential
Managers preferences
Benefits of locating abroad:
Lower site or land prices
Lower labour costs ­ however would the quality of the products be the same.
Avoid trade barriers
Take advantages of fast growing economies and markets.
Language differences may make communication with workers difficult.…read more

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Vertical forward integration: joining two businesses in the same industry but a different stage of
production towards the customer e.g. a farmers take over a butchers shop.
Diversification: joining two businesses in different industries e.g. an insurance company merges with
a publishing business.
Monopoly: any business with more than a 25 per cent market share.
Limited company: a business recognised as a legal unit that offers investors (shareholders) limited
Private limited company Ltd: a company that cannot sell shares to the general public.…read more

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Product life cycle: the lifespan of a product recorded in sales from launch to being taken of the
Competitive pricing: setting a price for a product based on prices charged by competitors.
Price skimming: setting a price at a high level to create a high quality exclusive image.
Penetration pricing: setting a price at a low level to gain greater market share.
Extension strategies: steps taken to extend the life cycle of the product.…read more

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