3.2.3 Organic growth Flashcards
organic growth
means that the business has grown from within
How may a business organically grow?
- increasing their product range
- opening more branches
- targeting foreign markets
- taking on more staff
- franchise
Franchise
an agreement between a b business owner and a franchisee, to sell the rights to use the businesses logo and brand in return for a fee and royalties
How does a franchise operate?
- franchisor provides the logo, training, equipment and promotion
- franchisee finds the premises, recruits staff and day to day runs the business
- franchisee pays the franchisor a set up cost, royalties and purchases the supplies needed
Positive impact on franchisor
- rapid expansion
- low costs
Negative impact on franchisee
- less control of the brand
- risk that it is run badly by the franchisee
- less profit margin - franchisee keeps revenue
Increasing product range - why does it work?
-This works because by widening the product portfolio it allows for alternative revenue streams which will allow the business to grow due to higher revenues.
Increasing product range - advantages
- Diversifying product portfolio
- Alternative revenue streams to existing products
- Low risk
Increasing product range - disadvantages
- r+d is expensive
- harder to coordinate operations
- increase cost of sales
Opening more stores - why does it work?
-This works because by opening new stores and branches the business is able to sell to more consumers.
Opening more stores - advantages
Closer to customers, therefore can compete better.
- gives more opportunity for promotion which can motive staff.
- may be able to recruit more people if you are nearer them.
- marketing and management EOS, costs spread over more customers and revenues.
- less risk, problem at one location doesnt mean whole business fails.
Opening more stores - disadvantages
- Communication becomes more challenging
- Increased risk- need to understand local ar
- Duplication of activities
- Harder to coordinate all operations
- high cost for premises and new employees
expanding into foreign markets - why does it work?
- This works as the business has access to a larger customer base
- creates a global brand which builds on your reputation
- positioning the business as a global brand leads to growth in customers and revenue
expanding into foreign markets - advantages
- stronger economic growth in emerging markets
- can achieve economies of scale, lowering costs
- Access to a new market, which could prove extremely successful and increase profitability.
- Spreading business risk
expanding into foreign markets - diadvantages
- Unfamiliar market, expensive or complex
- High risk
- Legislation, language issues, cultural differences
- No direct physical contact with customer
- Might have to alter products to meet the needs of the local market
expansion of the workforce - why does it work?
By investing in more permanent staff, the workforce benefits from added value through the gaining of skills, loyalty from permanent staff, and a stronger understanding of the company culture, which enables them to provide better service and quality. as you continue to expand, you can also invest in them through training in order to improve skills and quality, and also enabling you to make decisions that can propel the business forward
expansion of the workforce - - advantages
- new people can bring unique values and new perspectives, so the business can remain competitive and innovative
- leaves managers and leaders more time to focus on the core aspects of the business while the new employees specialise in their tasks
- can take on a higher workload and more clients steadily leading to sustainable growth and also more challenging projects as can delegate responsibilities
expansion of the workforce - - disadvantages
- hiring new staff is very expensive (training, insurance, retirement plans…)
- finding the best person for the job is time consuming and costly
- hiring lots of people at once can increase general overheads eg. office space
- even riskier if it is a start up (revenue may not be enough to pay wages)
- hiring lots of people increases the chance of conflict between staff and could reduce productivity
Franchising - advantages
=Grow your business (rapid expansion) in a cost-effective way (won’t need to cover investment cost of staff/buildings)
=You benefit from receiving franchise fees/royalties
=Develop brand name/image
=Increased purchasing power as business will be more secure which can provide access to better equipment
=Reduced risk
=Can allow new ideas for future success
=Easier management as franchisee will run their business
Franchising - disadvantages
- Potential risk as it could be badly run e.g. poor customer service - Could damage reputation for the whole business.
- Franchisee keeps revenue- Franchisor only payed a percentage of profits (lower profit margins)
- Takes a lot of time and capital to set up franchise model
- Have to develop and provide training to franchisees
Advantages of organic growth
- avoids the risks and pitfalls of joining with another business
- cheaper than inorganic
- retains the company culture
- can be planned for unlike a takeover
- higher production scale means economies of sale and lower average costs
Disadvantages of organic growth
- high risk strategy - capital required
- long period between investment and return on an investment
- growth may be limited and is dependant on reliability of sales forecasts/ revenue
- new markets and countries can be dangerous to enter into without forging links
