business in the real world - expanding a business Flashcards
What are the two types of expansion?
Internal and external expansion.
What is internal expansion?
When a business expands from within.
What is external expansion?
When a business grows by joining with another business.
What is internal expansion also known as?
Organic growth.
Give 3 methods of internal expansion.
- Franchising
- Opening new stores
- Expanding through e-commerce
- Outsourcing
Give 2 methods of external expansion.
- Mergers
* Takeovers
What is franchising?
When a company expands by giving other firms the right to sell its products in return for a fee or percentage of the profits.
Who are franchisors?
The business that manufactures products that it gives other businesses the right to use.
Who are franchisees?
The business selling the products that another business has given them the right to use.
Give 2 advantages of franchising for the franchisor.
- Increases their income
- Increases their market share
- Increases brand awareness
- Doesn’t have the usual risk and cost of running a new outlet
Give 2 disadvantages of franchising for the franchisee.
- Franchisee will keep a share of the profit
- Brand could get a poor reputation if a franchisee has poor standards
- Complex procedures to set up as a franchisor
Give 2 advantages of franchising for the franchisee.
- Already have a customer base
- Brand already has a reputation
- Can use national advertising campaigns
- Speeds up growth
Give a disadvantage of franchising for the franchisee.
• Franchisor will keep a fee/share of the profit
Give an advantage of opening new stores as a method of expansion.
- Low risk
* Increases sales
Give a disadvantage of opening new stores as a method of expansion.
• Incurs extra costs (e.g rent and staff pay)
What is e-commerce?
When a business sells its products or services via the internet.
Give 2 advantages of using e-commerce as a method of expansion.
- Access to a larger market
- Cheaper than setting up and running a new store
- Business can trade 24/7
Give a disadvantage of using e-commerce as a method of expansion.
• Technical problems can cause unsatisfied customers
What is outsourcing?
When a business uses a third party to carry out tasks on behalf of the business.
Give 2 potential benefits of outsourcing.
- May be quicker
- May be cheaper
- Tasks may be carried out to a higher standard
Give a disadvantage of outsourcing.
- Business lose some control over operations
* Business could get a bad reputation if the firm it outsources to has poor standards
What is a merger?
When two businesses join together to form a new, larger business.
What is a takeover?
When an existing business expands by buying more than half the shares in another business.
Give an advantage of a business merging with/taking over a supplier.
It can control the supply, cost and quality of its raw materials.
Give an advantage of a business merging with/taking over a customer.
Makes its easier to sell its products.
Give an advantage of a business merging with/taking over a competitor.
- More economies of scale
- Greater market share
- More able to compete
Give an advantage of a business merging with/taking over an unrelated business.
Diversifying into new markets reduces risks that come from relying on just a few products.
Give a disadvantage of takeovers.
They are often hostile.
Give one reason why mergers and takeovers are often unsuccessful.
- Management styles may differ between firms
- Employees may be demotivated
- Cost-cutting makes lots of people redundant
Give 2 advantages of internal growth.
- Relatively low risk
- Builds on the business’ strengths
- Can be financed through internal funds such as retained profit
- No risk of a clash of cultures
Give advantages of external growth.
- Can be achieved quickly
- Shares experitse
- Business has access to more customers
- Business can quickly establish itself in a new market
What are economies of scale?
Where the unit cost of production falls as the scal epf production rises.
What are the two types of economies of scale?
Technical and purchasing.
What are purchasing economies of scale?
When a business gains a discounted price from suppliers as they are buying in larger quantities.
What are technical economies of scale?
When a business invests in new product development or technology to make their production process more efficient.
What are diseconomies of scale?
When average unit cost increases.
What causes diseconomies of scale?
Growth.
Give 2 reasons why firms may encounter diseconomies of scale.
- Poor communication
- Coordination issues
- Reduced staff motivation
What is the formula for unit cost?
Unit cost = total cost/number of units
