Revision Notes- Enterprise Growth Strategies | Entrepreneurship Class 12 - Commerce PDF Download

Franchising

• Expansion of a concern may be:
  1. Internal expansion
  2. External expansion
• Internal expansion: Internal expansion results from the gradual increase in the activities of the concern. The concern may expand its present production capacity by adding more machines or by replacing old machines with the new machines with higher productive capacity.
• External expansion or Business combination: External expansion refers to business combination where two or more concerns combine and expand their business activities. In the process of combination, two or more units engage in similar business or related process or stages.
• Main forms of external expansion:
  1. Franchising
  2. Mergers and Acquisitions
• Franchising is an agreement whereby a manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties to standardized operating procedures.
• A franchise agreement is the legal document that binds the franchisor and the franchisee together.
• The main ingredients of a franchise agreement:
  1. Contract Explanation
  2. Operations Manual
  3. Proprietary Statements 
  4. Ongoing Site Maintenance
• Types of franchising:
  1. Product franchise business opportunity 
  2. Manufacturing franchise opportunity
  3. Business franchise opportunity ventures 
  4. Business format franchise opportunity
• Advantage to the franchisee:
  1. Product acceptance
  2. Management expertise
  3. Capital requirements
  4. Knowledge of the Market
  5. Operating and structural controls
• Disadvantages to the franchisee:
  1. Right and the only way of doing things
  2. Continuing cost implication
  3. Risk of franchisor getting bought 
  4. Inability to provide services

Mergers, Acquisitions and Reasons for Failure

• Mergers and Acquisitions (M&A) is a potential strategy for ensuring the accelerated growth of a business.
• Merger is a combination of two companies into one larger company.
• Forms of merger: 
  1. Amalgamation,
  2. Absorption.
• Types of mergers: 
  1. Conglomerate, 
  2. Horizontal, 
  3. Market Extension, 
  4. Vertical, 
  5. Product Extension.
• Conglomerate: A merger between firms that are involved in totally unrelated business activities.
• Horizontal merger: A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms which operate in the same space, often as competitors offering the same goods or service.
• Market extension mergers: A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.
• Product extension mergers: A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger SET of consumers. This ensures that they earn higher profits.
• Vertical merger: A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.
• Acquisition means a company buying most, if not all, of the target company’s ownership stakes in order to assume control of the target firm.
• Types of Acquisition: 
  1. Friendly acquisition: Both the companies approve of the acquisition under  friendly terms. There is no forceful acquisition and the entire process is cordial.
  2. Reverse acquisition: A private company takes over a public company.
  3. Back flip acquisition: A very rare case of acquisition in which the purchasing company becomes a subsidiary of the purchased company.
  4. Hostile acquisition: Here the entire process is done by force. The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, thereby establishing majority and hence initiating the acquisition. 
• Reasons for Mergers and Acquisitions:
  1. Synergy 
  2. Acquiring new technology
  3. Improved profitability 
  4. Acquiring a competency
  5. Entry into new markets 
  6. Access to funds
  7. Tax benefits
• Reasons for failure of Mergers and Acquisitions:
  1. Unrealistic price paid for target 
  2. Difficulties in cultural integration
  3. Overstated synergies 
  4. Integration difficulties
  5. Poor business fit 
  6. Inadequate due diligence
  7. High leverage 
  8. Boardroom split
  9. Regulatory issues 
  10. Human resources issues
• Mergers and acquisitions are external growth strategies and can take place within one country or across national borders.