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Strategy and SWOT Analysis (P2)
Integration and Growth - Coggle Diagram
Strategy and SWOT Analysis (P2)
Methods of growth:
- Internally (Organic)
- Externally (Inorganic)
Internal (Organic) - expansion from within the business
- Low risk by expanding in size by changing their business activities
- Control is easier to maintain
- Can be national or multinational approach
Methods of growing Organically:
- New products
- New markets
- New routes to market (accessible to customers)
- Franchising
- Diversification
- Reducing prices to attract sales
- Increased advertising
Advantages of growing organically:
- Less risky
- Avoids conflicts
- More likely to be funded with retained profit
- Greater consistency
- Maintain distinctive capabilities
- Less threat of brand dilution
- Can be steady
- Less loss of control
Disadvantages of growing organically:
- Missed opportunities from acquisitions
- Potential for growth maybe more limited
- Lack of shared expertise
- Lack of competitiveness due to a lack of economies of scale (especially if competitors are growing via organic methods)
- Pressure on leaders
- Dissatisfaction from shareholders
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External growth through mergers or takeovers can take a number of forms:
- Horizontal - 2 businesses at the SAME stage with a process integrate
- Vertical - 2 businesses at DIFFERENT stages within a process integrate
- Forward Vertical - closer to the customer (e.g. car manufacturer buying a retailer)
- Backward Vertical - closer to raw materials in the supply chain (e.g. McDonalds buying the farm 100% or drinks company buying bottling plant
- Conglomerate - 2 unrelated businesses integrate
- Diversification - moving into an unrelated area - Samsung design guided missile systems and run theme parks in South Korea
Advantages of Integration:
- Synergy - when you bring two things together, merge and make something better
- Economies of scale
- Profits
Disadvantages of Integration:
- Regulators
- Employees
- Costly
- Diseconomies of scale
Advantages of Vertical Integration:
- Control of the supply chain - helps to reduce unit costs and improve the quality of inputs into the production (supply) process
- Improved access to key raw materials
- Better control over retail distribution
- Removing suppliers and taking market intelligence away from competitors
Disadvantages of Vertical Integration:
- Fewer economies of scale as production is at different stages of supply
- Mergers can often create new problems of communication and coordination within the bigger more disparate firm
- Can lead to diseconomies of scale where the new bigger firm is more efficient
Global Franchises 2019:
- McDonald's
- Subway
- KFC
- Burger King
- Pizza Hut
- 7-Eleven
Franchises:
- A franchise is the replication of a successful business formula
- Franchising occurs when the owner of a business, the franchisor, licenses the use of trademarks and proven business ideas to another party, the franchisee
- Each business outlet is owned and operated by a franchisee
- However, the franchisor retains control over the way in which goods and services are marketed and sold and controls the quality and standards of the business
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- Franchise - a less risky option for growth but can mean additional costs and a loss of independence
- Franchisee - a business that has been granted permission from another business to trade using its name, goods and services in return for a fee (dividend = share of profits)
- Franchisor - is a business that sells a license granting permission to another business to trade using its name, goods and services, this allows for rapid growth, however it does come with the risk of reputation damage if standards are not maintained
Franchising:
- A 2 way relationship
- Franchisee pays an initial fee to the franchisor
- Franchisee pays an annual fee to the franchisor
- Franchisee often has to buy supplies from the franchisor
- Franchisee pays for a proven 'business format'
- Franchisee can use a well recognised name and brand
- Franchisor must support the franchisee in a range of areas
- This might include advertising, training, recruitment and a range of services
Benefits to the Franchisor:
- rapid expansion
- optimum size
- maximum profitability
- investment from others
- motivation
- buying power
- mass advertising
Disadvantages to the Franchisor:
- loss of control
managing growth
- enough staff
- enough resources
Franchisee benefits:
- lower risk
- established product
- experienced business
- brand awareness
- proven operation
- entering a new market
Franchisee disadvantages:
- lack of control
- have to follow the rules
- cannot sell without franchisor's permission
- must buy supplies from franchisor
- higher than expected costs e.g. start up, royalties , supplies and franchise renewals can be expensive
Rationalisation:
- often in response to diseconomies of scale e.g. Sainsbury's
- downsizing the scale of the business' operations e.g. closing branches, selling off parts of the business, delayering
Possible reasons include:
- turn around poor performance
- restructure to increase efficiency
- focus on the core business
- sell off less profitable parts of the business to improve overall performance
- following a merger or takeover to remove duplication of resources