Methods of Business Growth: Mergers, Joint Ventures and Franchising
Businesses can grow organically (internally, by increasing sales of existing products, opening new outlets, or reinvesting profit) or inorganically (externally, by combining with or drawing on another business). The main inorganic methods are mergers (two businesses agreeing to combine into one new entity) and takeovers/acquisitions (one business buying a controlling stake in another), which can be horizontal (combining with a business at the same stage of the same industry, e.g. two supermarkets), vertical (combining with a business at a different stage of the same supply chain, either forward towards the customer or backward towards raw materials/suppliers), or conglomerate (combining with a business in a completely unrelated industry, to diversify risk). Other inorganic methods include joint ventures (two or more businesses create a new, jointly owned entity for a specific project, sharing costs, risk and expertise, without either giving up its own separate identity) and franchising (the franchisor allows a franchisee to trade under its established brand and business format in return for fees, allowing faster growth with less of the franchisor's own capital, while the franchisor retains less direct control than in wholly-owned expansion).
Before you start
Make sure you're comfortable with these topics first:
Method
- Identify whether the growth described is organic (internal, using the business's own resources) or inorganic (external, involving another business).
- For inorganic growth, identify the specific method: merger, takeover, joint venture, or franchising, using the details given (does a new joint entity form and share ownership; is an existing brand being licensed out for a fee).
- If the method is a merger or takeover, classify it as horizontal, vertical (forward or backward), or conglomerate by comparing the two businesses' positions in their industries and supply chains.
- Match the method to the business's stated constraints and goals: limited capital and a wish to expand quickly while retaining brand control usually points to franchising; wanting to share risk and expertise for a single project points to a joint venture; wanting full control and willing to commit significant capital points to a takeover.
- Explain a benefit and a drawback of the chosen method specific to the scenario, not generic ones, e.g. a joint venture with a local partner in a new country provides market knowledge (benefit) but requires sharing profit and control with that partner (drawback).
- For an evaluate question, weigh growth methods against the risk of overtrading (growing faster than cash flow can support) and against the business's stated objectives before recommending one.
Worked example
A UK sandwich chain wants to expand into 20 new towns within two years, but has limited capital available and wants to retain control over its brand and food quality standards. Identify and justify the most suitable method of growth for this chain.
- Identify the chain's key constraints: limited capital, a need for fast expansion, and a wish to retain brand/quality control.
- Rule out a takeover or wholly-owned new outlets, since both require the chain itself to fund the expansion, which conflicts with its limited capital.
- Rule out a merger or conglomerate diversification, since these do not directly deliver the specific goal of opening more of the same branded outlets quickly.
- Identify franchising as the most suitable method: franchisees provide most of the capital to open and run each new branch, allowing the chain to expand into 20 towns far faster than it could fund alone.
- Justify the control trade-off: a strong franchise agreement (setting standards for ingredients, recipes and service) lets the chain retain meaningful control over brand and quality even though each outlet is independently owned, which addresses its stated concern.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define organic growth.Show answer
Answer: Growth achieved using a business's own internal resources, such as opening new outlets or increasing sales of existing products, rather than combining with another business.
Q2What is the difference between a merger and a takeover?Show answer
Answer: In a merger, two businesses agree to combine into one new entity; in a takeover, one business buys a controlling stake in another, which may not be by mutual agreement.
Q3A supermarket buys a farm that supplies it with vegetables. What type of vertical integration is this?Show answer
Answer: Backward vertical integration, because the supermarket has combined with a business earlier in its supply chain (a supplier).
Q4State one benefit to a franchisee of buying a franchise rather than starting an independent business.Show answer
Answer: They benefit from an already-established, recognised brand and a proven business format, which typically carries lower risk of failure than starting a completely new, unknown business.
Q5State one drawback to a franchisor of growing through franchising.Show answer
Answer: The franchisor has less direct day-to-day control over how each outlet is run compared with owning and operating it directly, which can create inconsistency in customer experience.
Q6Give an example of conglomerate integration.Show answer
Answer: A tobacco company acquiring a food manufacturing business (or any example combining two businesses in unrelated industries).
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
Analyse the benefits to a business of growing through a joint venture rather than organic growth.
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OakBridge Bakeries, a UK bakery chain with 30,000 pounds of spare cash, wants to enter the growing Spanish bakery market within a year. It has no existing knowledge of Spanish consumer tastes, food regulations, or property markets. A well-established Spanish bakery chain, ManPan, has approached OakBridge proposing that the two firms jointly set up and share ownership of a new company to trial OakBridge's bread recipes in ManPan's existing Spanish stores, splitting costs and profits equally. Separately, OakBridge could instead spend its 30,000 pounds researching and opening one wholly-owned store in Madrid on its own. Evaluate which option OakBridge should choose to enter the Spanish market.
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