1.5 Pt 2 : Types Of Business Growth Flashcards
Reasons to stay small
• Personalised service & customer loyalty
• Quick response to market changes
• Limited access to finance
• Avoid diseconomies of scale
• Owner lifestyle choice
• Focus on profitable niche markets
Advantages of staying small
✅ Customised products/services
✅ Strong customer relationships
✅ Responsive to market
✅ High prices in niche = high profit
✅ Lower overheads
Disadvantages of staying small
❌ Vulnerable to recessions
❌ Limited finance
❌ Staff recruitment difficulty
❌ No economies of scale = higher unit cost
❌ Owner dependency
Reasons for business growth
- Gain power over customers/suppliers
• Achieve economies of scale
• Diversify products
• Improve finance access
• Owner ambition
• ⬆️ Market share = ⬆️ profit
Define internal growth
• Business grows using its own resources (e.g., launching new products, opening stores).
• Retains full ownership and control. (Although slower)
Define external growth
• Growth by merging with or acquiring another firm.
• Involves strategies like alliances, mergers, or takeovers.
- Allows rapid growth, access to new markets or resources
Define merger
• Two firms agree to combine and form a new entity.
• Typically mutual and benefits both companies through shared resources + operations
Define friendly takeover
• One company acquires another with full board/shareholder approval.
• Often to enter new markets or gain capabilities.
Define hostile takeover
• One firm acquires another without consent of its board of directors
• Buys majority shares directly from shareholders , often leading to conflict
Internal growth – advantages
✅ Manageable pace
✅ Less risky (uses internal finance)
✅ Avoids diseconomies of scale
✅ Management understands all areas of business
Internal growth – disadvantages
❌ Slower growth
❌ Limited access to finance
❌ May not benefit from economies of scale
Define joint ventures
2 or more businesses create a new, separate legal entity, sharing resources, risks, and profits for a specific project or period
firms retain their own legal identity but contribute expertise, capital, or assets to pursue shared objectives
Advantages of joint ventures
✅ Economies of scale = ⬆️ profit
✅ Retain individual identity
✅ Access new markets
✅ Exchange of knowledge, tech, expertise
Disadvantages of joint ventures
❌ Decision-making conflict
❌ Slow negotiations
❌ Sharing sensitive info = risk
❌ Culture clash = ⬇️ quality/sales
❌ Shared profits
Reasons for joint ventures
• Spread risk in unfamiliar markets
• Enter new markets
• Secure resources/suppliers
• Maintain/increase global competitiveness
Define franchising
- Form of external growth where one business (the franchisee) buys the rights to operate under the name, systems, and brand of another business (the franchisor)
- In return, the franchisee pays an initial fee and ongoing royalties, while receiving support, branding, and training from the franchisor
State 2 key features of franchising:
Common method of international expansion.
Enables rapid market penetration with reduced financial risk to the franchisor
Advantages of franchising
✅ Rapid expansion with lower financial risk for the franchisor
✅ Motivated franchisees (financially invested)
✅ Franchisees bring local market knowledge
✅ Shared marketing and brand power
✅ Economies of scale in operations
✅ Brand recognition attracts customers quickly
Disadvantages of franchising
❌ Franchisor earns only royalties
❌ Risk of inconsistent brand quality/reputation
❌ Legal and regulatory complexities
❌ Franchisor must invest in training/support
❌ Loss of control over daily operations
Define strategic alliance
A partnership between two or more businesses that collaborate to achieve common objectives without forming a new legal entity.
Each business remains independent, but shares resources, expertise, or access to markets for mutual benefit
Joint venture vs strategic alliance
Joint Venture
• New legal entity is formed
• Ownership & control are shared
• Usually long-term or permanent
Strategic Alliance
• No new entity is created
• Firms retain separate ownership
• Temporary or goal-based duration
Define vertical integration
• Expansion by merging with or acquiring a business at a different stage of the supply chain. 2 types:
• Backward vertical integration = towards supplier
• Forward vertical integration = towards distributor/. retailer
Define horizontal integration
Growth by acquiring or merging with a business at the same stage of production (often a competitor in the same industry).
