INTERNAL AND EXTERNAL GROWTH Flashcards
What is internal growth?
Internal growth, grows out of the already existing operations of the business. It is not risky, it is a slow growth and most of it is self-financed using the retained profits of the business.
What is external growth?
External growth occurs when the business expands by entering into some type of arrangement to work with another business. It requires significant external financing, it is very risky and it is a rapd growth.
What happens if External Growth is successful?
- Increased Market Share
- Decrease in Competition
When do acquisitions and mergers happen?
This type of expansion occurs when two businesses become integrated.
What is a merger?
It is when two or more businesses join together to form a bigger combined business.
What is an acquisition?
An acquisition is a business transaction that occurs when one company purchases and gains control over another company.
What is a takeover?
It is when the acquisition is unwanted. It can only happen to Public Held companies whose shares sell in public forums.
What is Horizontal Integration?
Both businesses are at the same stage of the supply chain and same business line.
Advantages of Horizontal Integration
- Increased Market Share
- Market Power
- Advantages of Economies of Scale
What is Vertical Integration?
The businesses are at different stages of the supply chain.
Advantages of Backwards Vertical Integration
- Ensured Realiable Supply
- Avoiding Government Regulations (Taxes, Price controls)
- Reduced Transaction Costs
- Eliminate Market Power of other businesses.
What is Backwards vertical integration?
The business becomes involved with another business that’s located at earlier stage of the supply chain.
Happens when a business wants to protect its supply chain.
Pros of Backwards Vertical Integration
The upstream stage can treat the downstream stage with preference in terms of:
- More quantity
-More availability
-Cheaper
What is Forward Vertical Integration?
The business integrates with a business which is at a later stage of the supply chain. It usually occurs when the business wants to ensure a secure outlet for its products.
What is a Conglomeration?
Conglomeration describes the process by which a conglomerate is created, as when a parent company begins to acquire subsidiaries.
What is a Joint Venture?
A joint venture is formed when two businesses agree to combine their resources to create one separate business over a set period of time. This business created is legally separated from the two businesses that have created it.
Once the time period originally set ends, the business can either be dilluted, can be incorporated to one of the business parents or the time period can be extended.
Advantages and Disadvantages of Joint Ventures
+ Way to enjoy greater sales
+ Each business parent can bring different areas of expertise to the table.
- Limited control + Conflict
- Complex Agreements
- One of the businesses might realize that it could’ve achieved the same goals without having to create a joint venture and have to split the profits.
What is a strategic alliance?
A strategic alliance is a collaborative relationship between two or more organizations formed to achieve specific business objectives while remaining independent entities. These alliances involve sharing resources, capabilities, and risks to create mutual benefits.
Advantages + Disadvantages of Strategic Allicances
-Strategic:
+ More than two businesses involved
-Challenging coordination and decision making
+ No new legal business is created
-Less force than legally incorporated ventures
+ More Fluid than joint ventures
-Lack of stability
+ Individual businesses remain independent and often compete with eachother
-Don’t get the capital strength of a legal merger
+ Strategic alliances diversify revenue streams, grant access to potentially difficult-to-obtain resources, and may improve a company’s public image.
What is a Franchise?
A franchise occurs when a business that has developed an orginial concept such as a good or a service sells the right to other businesses or individuals to sell the exact same concept. The business who sells the right is the Franchisor and the business that purchases the right is called a Franchisee. Franchises are a form of external growth and are commonly used when a business wants to expand globally. The franchise has to be exactly identical to the original business concept.
What are the Responsibilities of the Franchisor?
- Provide stock
- Provide fittings
- Provide uniforms for the staff
- Provide training for the staff
- Global promotion
- Global advertisement
- Legal and financial aid
What are the responsibilities of a Franchisee?
- Set wages and prices
- Employ workers
- Local advertisement
- Local promotions
- Pay an agreed royalty on sales
- Only sell the products of the franchisor
Advantages of a Franchisee
- Set up costs are reduced
- Franchisor provides financial, legal, technological and managerial help.
- Ensured supply
- The format of selling the product is already established
Disadvantages of a Franchisee
- Unlimited liablity
- No control over supply
- No control over what to sell
- Has to pay royalties to the Franchisor
Advantages of a Franchisor
- Responsible for all global deisions
- Makes use of local knoledge and expertise, no need for market research
- Not liable or responsible for the franchises
- Quick access to wider markets
Disadvantages of a Franchisor
- No control over their imaqge, id a franchisee operates wrong the image of the Franchisor gets ruined
- Looses day to day responsibility of the businesses
