AQA Business GCSE - Unit 2 - Expanding a Business

AQA Business GCSE - Unit 2 - Expanding a Business

1. External Growth (Integration)

   • There are two types of external growth.
     • Merger
       • A merger occurs when two or more firms join together and create a joint business.
       • These deals make the businesses bigger and more often than not, more profitable.
       • An example of a merger is when Activision and Blizzard (gaming companies) joined together in a deal work £9.15 billion.
       • Shareholders of the original businesses now become shareholders in the bigger business.
     • Takeover
       • A takeover is when one business buys the rights to another.
       • A takeover can also be called an acquisition.
       • An example of a takeover is when the shareholders of Reebok sold their shares to Adidas and they took over and the shareholders were no longer the owners.

2. Types of Integration

   • Horizontal Integration
     • This happens when one firm joins another at the same stage of the same production process.
     • An example of this is when RBS bought NatWest.
   • Vertical Integration
     • This occurs when a firm joins with another at a different stage of the same production process.
     • This can be backward vertical integration when a firm joins with its suppliers, or it can be forward vertical integration when a firm joins with its distributors.
     • An example of forward is when Pepsi bought KFC so they could sell their drinks there.
   • Conglomerate Integration
     • This occurs when a firm joins with another in a different type of production process.
     • For example, Rentokil businesses include office cleaning, security, pest control and parcel delivery, which are all very different.

3. Advantages and Disadvantages of Integration

   • Advantages
     • Horizontal can lead to economies of scale as more of the same output is being produced.
     • Vertical integration can ensure a firm keeps control of its supplies and distribution, which can improve quality and reliability and reduce costs.
     • Conglomerate integration can spread risks as a firm is operating in more than one market. This means a fall in demand in one market may be offset by an increase in demand in another.
   • Disadvantages
     • Diseconomies of scale are the problems with controlling, communicating and motivating staff in a bigger business.
     • Culture clashes can occur if the two businesses that have merged have different ideas about different things.

4. Franchises

   • Advantages of selling franchises
     • The franchise provides most of the finance to set up the new business.
     • The franchisor gets a fee from franchisees and a percentage of their profits.
     • The franchisee will be motivated as he gets most of the profits.
     • Franchisees can learn from each other to make their businesses better.
     • All franchisees can get together to market the business which means there is more money to invest in it.
   • Disadvantages of selling franchises
     • The original entrepreneur no longer owns all of the business.
     • If there is a problem with one franchise, then it can damage all the other franchises because brand image will be damaged.

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