1.7 Expanding a Business

Question 1

Takeover

Answer 1

Also called an acquisition, one company buys another. This could be by buying a majority of the shares, or by buying the company outright.

Question 2

Merger

Answer 2

Two companies agree to join together – both original sets of owners keep some ownership.

Question 3

Forwards Vertical

Answer 3

A business integrates (merges with or takes overs) a business closer to the customer. i.e. a manufacturer buying a retailer who sells their goods.

Question 4

Backwards Vertical

Answer 4

A business integrates with a business further away from the customer. i.e. a retailer buying a manufacturer that supplies them with goods.

Question 5

Horizontal

Answer 5

A business integrates with a business who operate in the same market as them, at the same stage of production. i.e. two car manufacturers like Jaguar and Land Rover.

Question 6

Lateral

Answer 6

A business integrates with a business who operates in a different market, possibly at a different stage of production. i.e. Tata, who bought Jaguar Land Rover, and PG Tips.

Question 7

Outsourcing

Answer 7

Paying another company to do some of your work for you, or perform certain jobs for you.

Question 8

Franchising

Answer 8

Selling the right to use your brand – you (the Franchisor) allow other companies (Franchisees) to use your name, logo and products.
Usually there is:
– An initial set up fee
– A % of sales turnover is paid annually to the
franchisor - this is called royalty

Question 9

Organic growth

Answer 9

• Organic growth means that the business has
grown from within
• This may be through;
– Franchising
– Opening more stores
– Expanding through e-commerce
– Outsourcing

Question 10

Methods of expanding through e-commerce

Answer 10

– By adding a website
– By adding an online shop
– By selling on online auction sites
– By adding an online booking feature to the
website

Question 11

Inorganic growth

Answer 11

A business may decide to grow quicker and so it
will decide to merge or takeover another
business:
1. Merger– two businesses merge to become one
new one
2. Takeover– One business will takeover a another
business (by buying more than 50% of the
shares), sometimes this can be hostile if the
shareholders don’t agree

Question 12

Disadvantages of organic growth

Answer 12

a) This is a very high risk strategy, opening lots
of stores or taking on new staff is very risky
b) Long period between investment and return
on investment
c) Growth may be limited and is dependent on
reliability of sales forecasts

Question 13

Adavantages of merging

Answer 13

a) Economies of scale; Better deals because of
increased order size, bulk-buying discounts etc
b) Increased revenue and market share; Increased
size of the combined company increases market
power and ability to set higher prices

Question 14

Disadvantages of mergers

Answer 14

a) Clash of cultures; All businesses have a slightly
different culture and they may not work well together
b) Possible communication problems; as the business
gets bigger, or if there are now too many employees
c) Unreliable merger partners; A good merger will
depend on trust between the businesses
d) Diseconomies of scale; As a business gets larger costs
will go up with problems of motivation, communication and co-ordination
e) 80% of all mergers fail*

Question 15

Benefits to business of takeovers

Answer 15

• Buying a competitor eliminates the threat of
that competitor
• Takeover is an excellent way to gain valuable
assets e.g. sites in London
• Gain economies of scale through bulk buying
• Increases the market share of the business
and gives it synergy

Question 16

Drawbacks to business of takeovers

Answer 16

• This is a very expensive and risky way to grow a
business
• The takeover deal may have additional legal costs
• The deal may need outside investment which
may result in a loss of control for the owners
• Lots of resources may be needed to rebrand the
new sites, retrain the staff and integrate the
takeover