external growth positives and negatives

What is external growth?

This is growth that involves the capital and assurance of other businesses. This is achieved through a merger, takeover or franchising

What is a merger?

A merger is a voluntary and agreed joining of 2 firms in order to form one larger business. All the capital and resources such as premises, machinery and personnel are joined together into one bigger business

What is a takeover

A takeover occurs when one business buys control of another. This is achieved by buying enough shares in the firm to be able to outvote other shareholders. Takeovers can be either hostile or friendly.

What is franchising?

This is where an already established business offers for sale to other business or individuals the right to use its product, services and logo, in a certain geographical area.

Franchising positive 1

the franchiser will receive yearly royalty payments from each franchisee. This means that the franchiser is getting profit each year without having to invest capital to open another location

Franchising positive 2

The franchiser will benefit from economies of scale. This is because the franchiser can buy raw materials in bulk and sell them to each of the franchisees. This will reduce costs for the franchiser

Franchising negative 1

The franchiser must provide on going training and support to the franchisees which is therefore time consuming and costly

Franchising negative 2

The franchiser loses the day to day running of the franchisee locations. This means that if a local store is ran poorly, the reputation of the whole franchise will be damaged

Takeover positive 1

New firm may benefit from economies of scale and shared knowledge. This means the cost per unit will decrease, lowering the cost of production

Takeover positive 2

Greater profit may enable more investment in research and development. This means that the business can invest to produce better quality products/services than their competitors

Takeover negative 1

Where a takeover is hostile, the main implications for the new business are strained relationships at managerial levels, which means the business may be unable to run effectively, increasing the chances of failure.

Takeover negative 2

New firm may experience diseconomies of scale, because it is more difficult to coordinate a larger firm or control as the new firm is so large

Merger positive 1

Merging can enable the business to save capital because one merged company is able to operate with less equipment and other resources than 2 separate companies

Merger positive 2

The business is operating on a larger scale and so can benefit from economies of scale, which will reduce costs. This should lead to increased profits

Merger negative 1

As 2 businesses merge, conflict could exist between both parties. This could negatively affect the day to day running of the firm if staff within the new firm cannot work together

Merger negative 2

As 2 businesses merge to become one, there is a possibility of staff redundancies. As a result with will lead to a low staff morale and demotivated employees