2.1 Internal Business - Growth Strategies

Question 1

What is difference between internal and external growth strategies?

Answer 1

Internal is opening new branches or new products

External is merging with or buying/taking over other companies

Question 2

What are the advantages of business growth?

Answer 2

• More market share - getting the other business’ customer base
• New technology from the other company you purchased
• Internal economies of scale

Question 3

What are the disadvantages of business growth?

Answer 3

• Expanding the business takes up a lot of cash flows witch can be used for other thing or might financial strain
• Managing much more staff all of a sudden might strain the systems (way of doing things). Management resources stretched thin.
• May have to make employees from purchased company redundant

Question 4

What are economies of scale?

Answer 4

As you produce lots of units, the cost of producing those units goes down per unit.

Question 5

What are the two directions a business can grow in?

Answer 5

Horizontal integration - you purchase a business in the same industry, at the same part of the production process e.g. sports retailer buys sports retailer or rugby ball distributor buys rugby ball distributor.

Vertical integration - purchasing a business in a different part of the production chain

e.g. a pizza shop buys a vege producer

a rugby ball manufacturer purchases a rugby store

Question 6

What is the advantage and disadvantage of horizontal integration?

Answer 6

Advantage: already know the product and market, so you have access to more customers, more sales revenue.

Disadvantage: customers get less choice so may not be happy, resulting in less brand loyalty.

Question 7

What is the advantage and disadvantage of vertical integration?

Answer 7

Advantage: Less costs for the company as they own another part of the production process.

Disadvantage: New market and product, so may not have expertise/knowledge to do well.

Question 8

What is diversification?

Answer 8

Make new types of products, services or open businesses in other industries.

e.g. TradeMe do buying and selling, job listings and dating (for the old folks)

Question 9

What are the advantages and disadvantages of diversification?

Answer 9

Advantage: new sources of income because they are in multiple markets/industries.

Disadvantage: not much expertise in the new area, may be spreading their resources too thinly, meaning both products/businesses struggle.