Types of Business Growth (DP IB Business Management)

The pace of growth is manageable

Less risky as growth is financed by profits & there is expertise in the industry

Avoids diseconomies of scale

The management know & understand every part of the business

The pace of growth can be slow & frustrating

Not necessarily able to benefit from economies of scale

Access to finance may be limited

Reduces the cost of production as middle man profits are eliminated

Lower costs make the firm more competitive

Greater control over the supply chain reduces risk as access to raw materials is more certain

Quality of raw materials can be controlled

Forward integration adds additional profit as the profits from the next stage of production are assimilated

Forward integration can increase brand visibility

Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Possibly little expertise in running the new firm results in inefficiencies

The price paid for the new firm may take a long time to recoup

Rapid increase of market share

Reductions in the cost per unit due to economies of scale

Reduces competition

Existing knowledge of the industry means the merger is more likely to be successful

Firm may gain new knowledge or expertise

Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Reduces overall risk of business failure

Increased size & connections in new industries opens up new opportunities for growth

Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate

Possible lack of expertise in new products/industries

Diseconomies of scale can quickly develop

Usually results in job losses

Worker dissatisfaction due to unhappiness at the takeover can reduce productivity

Economies of scale gained from costs spread over larger output can lead to increased profit margins 

Both businesses retain their own identity as the joint venture is set up as a separate business for a limited period of time

• When the joint venture comes to an end, the partners continue to operate their original businesses as before

Opportunity to enter new markets which otherwise may be closed to the business

Joint ventures often involve the exchange of technology, expertise, or specialised knowledge

• This can enhance the capabilities of the venture and provide access to new opportunities

In a joint venture, both businesses have a say in decision-making

• This shared control can lead to conflict, especially if the partners have different management styles or strategic goals

Reaching agreement may require extensive negotiations, which can slow down the decision-making process

Sharing sensitive information, such as trade secrets, can be a concern if the partners are competitors

A culture clash between the two businesses can affect the quality of the business, leading to poor sales

Joint venture partners share both profits and costs

• If one partner contributes more resources or effort than the other, there may be disagreements about the distribution of profits, leading to conflicts

Rapid Expansion: Franchising allows for accelerated growth compared to traditional expansion methods

Capital Injection: Franchisees typically invest their own money to set up and operate their franchise units

• This relieves the franchisor from the burden of funding the expansion, reducing financial strain on the parent company

Local Expertise: Franchisees are often local entrepreneurs who possess in-depth knowledge of their markets

Motivated Operators: Franchisees are more likely to be highly motivated and dedicated to ensuring their business thrives, as their financial success is directly linked to the performance of their franchise

Brand Recognition: With each new franchise unit, the brand's visibility and presence increases

Loss of Control: Franchising involves granting a degree of control to franchisees and this may lead to variance in product standardisation and quality

Shared Profits: Franchisees typically pay ongoing royalties to the franchisor, reducing the overall profit margin for both parties and for the franchisor, it limits the potential earnings compared to fully owned units

Reputation Risks: The actions of individual franchisees can impact the overall brand reputation

• A single poorly managed or customer service failure at a franchise location can have a negative impact on the entire franchise network 

Initial Investment and Support Costs: The franchisor must invest in establishing and maintaining a comprehensive franchise support system

• This includes developing training programmes, operational manuals, and ongoing assistance to ensure consistent quality across franchise units

Legal and Regulatory Compliance: Franchising involves navigating complex legal frameworks, including franchise disclosure documents, contracts, and compliance with franchise regulations

A joint venture involves the creation of a new legal entity by two or more businesses

A strategic alliance is a cooperative arrangement between two or more companies without the formation of a new legal entity

In a joint venture the participating companies jointly own and control the new entity

In a strategic alliance each participating company retains its ownership and control and makes its own decisions 

Joint ventures are often intended to be long-term or permanent collaborations

• Each company make significant investments and commitments to the joint venture with the expectation that shared operations will be ongoing

Strategic alliances can vary in duration

• They are generally formed for a specific project and can be terminated once the agreed-upon goals are achieved

Joint ventures usually have a broad scope of collaboration

Strategic alliances are usually focused on a specific area of cooperation

• Companies join forces to pursue a particular goal such as entering a new market or conducting research and development