Enterprise Growth Strategies

This page contains the CBSE entrepreneurship class 12 chapter Enterprise Growth Strategies notes. You can find the questions/answers/solutions for the chapter 4 of CBSE class 12 entrepreneurship in this page.

What are the options that an organization have for expanding?
An organization can expand either through

  1. Internal expansion or
  2. External expansion

Define franchisor
Franchisor is the manufacturer or sole distributor of trademarked product or service who gives exclusive rights to the local distribution to the individual retailers so as to earn the royalties.






Define franchisee
Frachisee is the person who buys the franchise to take advantage of an already successful business.

Define franchising
Franchinsing is a deal between two entities namely

  1. The manufacturer or the sole distributor of a trademarked product or service (known as franchisor)
  2. retailers (known as franchisee)

get into an agreement.
As part of this agreement the franchisor provides exclusive rights to the franchisee for local distribution of their product or service.
In return the franchisee pays the royalties to the franchisor.

Which type of franchising is most widely used in the franchising world?
Business format franchise opportunity is most widely used in the franchising world.

Define acquisition
Acquisition is a process where in an organization purchases all or almost all the ownership stakes of another organizations so as to take complete control of that organization.

What are the possible ways in which an organization can expand externally?
An organization can expand externally in any one of the following 3 ways.

  1. Franchising: In this form, the manufacturer or the sole distributor of a trademarked product or service gives exclusive rights to the local distribution to the individual retailers so as to earn the royalties. This is done through the franchise agreement. This helps the franchisor to expand their business without investing any capital or manpower or time. The following are the types of franchising.
    1. Product franchise business opportunity.
    2. Manufacturing franchise opportunity.
    3. Business franchise opportunity ventures
    4. Business format franchise opportunity.
  2. Mergers: In this form of expansion two companies join hands to form a larger company through strategies like stock exchange or cash payment to the target. The acquiring organization acquires all the assets and liabilities of the merged company. Merger can happen in two ways:
    1. Amalgamation: Two organizations are merged to form a single new organizations. The combining organizations will cease to exist.
    2. Absorption: One organization gets absorbed into another.

    The following are the different types or mergers:

    1. Conglomerate
    2. Horizontal
    3. Vertical
    4. Product extension
    5. Market extension
  3. Acquisition: Acquisition also called as takeover is a process where in an organization purchases all or almost all the ownership stakes of another organizations so as to take complete control of that organization. The payment is done either through cash or the acquiring company’s stock or both.
    There are four types of acquisisions:

    1. Friendly
    2. Reverse
    3. Back flip
    4. Hostile

What is the significance of franchising?
The following is the significance of franchising.

  1. It helps individuals to take advantage of of an already established business model and derive success from that. They do not have to start from scratch.
  2. The success rate is more in opening a franchise than starting a new business.
  3. The products, services and business processes are well in place and need not be worked upon from the start.
  4. It helps the businesses to expand quickly without any need of additional investment while ensuring a guaranteed return while reducing the maintenance.
  5. The fronchisor businesses get the right personnel who are really interested to grow the business. The helps in achieving accelerated growth.

What are the differences between consolidation and merger?

Perspective Consolidation Merger
Definition One company acquires another company and takes over the assets and liabilities of the merged company. Two companies of similar size combine and form one bigger company.
Resultant company The company absorbed ceases to exist and only the company which acquired the smaller company exists. Both the companies involved cease to exist. A new large company comes into existence.
Formation A + B = A, where the firm B is merged into the firm A. A + B = C, where C is an entirely new big entity.
Other Name This is also called as absorption. This is also called as amalgamation.

Give a brief of each type of merger that the organizations adopt.
The mergers are classified based on

  1. economic function
  2. purpose of the business transaction
  3. and relationship among the merging companies

They are

  1. Conglomerate: When two companies which are in entirely different businesses merge, it is called as conglomerate. It is further classified as
    1. Pure conglomerate: In this the two firms have nothing in common.
    2. Mixed conglomerate: In this the two firms are looking for product or market extensions.
  2. Horizontal merger: When two companies which are in the same industry merge, it is called as horizontal merger. It occurs between companies that are competitors in the same industry and are offering the same goods or services. This type of merger usually occurs in the industries where there are few competitors and the competition is high. When these industries merge they’ll have much bigger synergies and potential gains.
  3. Market extension merger: This occurs between two firms that are offering the same products but in different market regions. The motive behind this type of merger is to make sure that the merging companies will be able to operate in a bigger market and there by getting huge number of clients.
  4. Product extension merger: This type of merger occurs between two companies that offer the products that are related to each other and operating in the same market. The merger helps to group the products together and reach a huge client base. It increases the profit margins too.
  5. Vertical merger: This occurs between two companies which are producing different goods or services for one specific finished product. It occurs when two or more firms that offer products which are part of an industry’s supply chain merge their operations. The purpose of merger is to increase synergies created by the merging entities and operate more efficiently as a single business unit.

Give a brief of each type of acquisition that the organizations adopt.
There are four different types of mergers specified as follows.

  1. Friendly acquisition: The acquisition occurs through mutual approval of both the companies. The process is friendly.
  2. Reverse acquisition: A private company acquires a public company.
  3. Back flip acquisition: The purchasing company will become the subsidiary of the purchased company. This occurs very rarely.
  4. Hostile acquisition: A bigger company creates an atmosphere where in a smaller company is forcefully made to accept the acquisition to save itself. If the smaller company does not accept the acquisition, the bigger company buys off all of its shares. The bigger company thus becomes a major stake holder and then start the acquisition process.

Through examples, explain what you have understood by value addition.
Definition: Value addition refers to value added to the goods and services through different means so as to create a new product that has greater value to customers.
Examples: 💡

  1. Bread made out of wheat
  2. food fortified with additional nutrients
  3. Fabric is made out of cotton
  4. Plain houses turned into modern homes after interior decoration.
  5. Incorporating video project capabilities in a mobile phone

What are the different types of franchising?
The following are the different types of franchising

  1. Product franchise business opportunity:
    1. The manufacturer authorize a store owner to distribute their products.
    2. The store owner can also use the name and trade mark of the manufacturer.
    3. The store owner has to pay certain fee and buy certain minimum stock from the manufacturer.
    4. Example: Tire franchises 🚗
  2. Manufacturing franchise opportunity:
    1. The franchisor authorizes a manufacturer to manufacture and sell their products.
    2. Mostly found in food 🍔 and beverage 🍹 industry.
    3. The bottles and other ingredients are supplied by the franchisor.
    4. The franchise will produce, bottle and distribute soft drinks 🍹
  3. Business franchise opportunity ventures:
    1. A business should purchase and distribute products for one specific company.
    2. The company will provide customers or accounts to the business owner.
    3. The business owner pays a fee or other consideration to the company.
    4. Examples are vending machine routes and distributorships 📦
  4. Business format franchise opportunity:
    1. The company provides a business owner with a proven method of running a business. The company will provide all the assistance to set up and run the business.
    2. The business owner can use the company name and trademark.
    3. The company collects a fee or royalty in return from the business owner.
    4. At times, the business owner has to purchase the inventory from the company.
    5. This is the most popular form of franchising.
    6. Examples are KFC 🍗, McDonalds 🍔 and Dominos 🍕

What are the disadvantages that someone is likely to face by taking a franchise?
The following are the disadvantages of taking up a franchise as it is like that the differences arise between the franchisor and franchisee regarding specific formal and informal commitments that are not implemented. Few of these are

  1. Right and the only way of getting the things done: The freedom of the franchise is limited. The franchisor tries to exert exaggerated levels of control. The owner of the franchise is likely to feel that their freedom is lost their freedom to innovate is reduced.
  2. Continuing cost implication: Apart from the fee and royalties paid, the franchise should continously share the revenue with the franchisor. In addition to this the franchisor charges for the services like advertising and training. The more reputed is the franchisor, the more are these costs.
  3. Risk of franchisor getting bought: The franchisee suffers problems, losses and difficulties when the franchisor fails or if the franchisor is bought out by another business.
  4. Inability to provide services: When the franchisor is unable to provided services as advertised the franchisee will go into a risky situation as the required support to run the business is not available.

Define synergy. Explain in which forms the synergy prevails.
Synergy refers to the difference between the value of the resulting entity formed by the merger of two firms and the sum of the individual values of the merging firms. Synergy accrues 💡 as revenue increase and cost savings. In other-words
V(AB) > V(A) + V(B)
where V(AB) = Value of the big entity formed by merging entity A and entity B.
V(A) = Value of the entity A taken alone.
V(B) = Value of the entity B taken alone.
Thus when the combined value of the merged entity is more than the individual values of the business entities A and B before merger, then only it can be said that the merger is benefiting through the synergies.
Synergy can take place in the following forms.

  1. Operating synergy: This is the cost savings that resulted from the economies of scale or increased sales and profits. It results in overall development of the firm.
  2. Financial Synergy: This due to financial factors like
    1. Lower tax
    2. Higher debt capacity
    3. Better use of surplus cash

    When a firm is running in loss 📉 or it has un-absorbed depreciation, it can benefit by merging into a profitable firm 📈. The merger can overcome the losses through its profits. This results in a financial synergy known as tax shield 🛡.

Enumerate various types of value additions.
Value addition is used to improve the products and services. The various types of added values can be applied together irrespective of the current product or service cycle.

  1. Quality added value: This consists of adding
    1. convenience
    2. ease of use
    3. or any other characteristics that the customers 💗 value

    Examples: Converting a commodity into branded product or design improvements by adding pull tabs for easily opening or sipper tops on beverage bottles.

  2. Environmental added value: Providing environment friendly methods or systems which are eco-friendly. Something like using
    1. less electricity
    2. increased fuel efficiency
    3. using recycled packaging material

    etc.

  3. Cause-related added value: This is a social marketing strategy where in the business contributes part of the revenue from the sale of a product or service to contribute to a cause. Examples include a business donating a percentage of revenue from each transaction to a cause such as providing quality education to the underprivileged children or contributing to the wildlife preservation.
  4. Cultural added value: This is also a social marketing strategy where in the the methods or systems of production incorporate cultural aspects or they allow for the needs and sensitivities of cultural groups. For instance, promoting halal food (considering the Islamic standards) or using the language used by other ethnic groups in a community in all the written communication.

What are the benefits enjoyed by both the franchisor and franchisee through franchise?
The following are the benefits for the franchisee through franchising.

  1. Product Acceptance: As the business franchised already is established in the market and well known to customers, the franchisor inherits these merits and do not have put additional effort in building the credibility right from the scratch. They have a readily available accepted name.
  2. Management expertise: A well established business will have management expertise in it. The franchisor can immediately take advantage of this management expertise to set up and operate the franchise. The training is provided by the franchisor and sometimes the franchisee gets an opportunity to work in the real time environment and gain the necessary management expertise to operate the franchise. In addition to the initial training there will be ongoing support to resolve the issues faced while running the franchise.
  3. Capital requirements: The cost for setting up the franchise is less that what it would have been if the entrepreneur is establishing their own venture. Significant market analysis is done by the franchisor before permitting the allocation of the franchise. So, the entrepreneur have a business that is far more likely to perform well. Sometimes the initial capital requirements are born by the franchisor only. In addition there will be significant savings in the running of the business too as the entrepreneur is starting up an already established business model.
  4. Knowledge of the market: The expertise of an already established business is readily available. All the necessary help is provided by the franchisor. Continuous market analysis is taken care of by the franchisor and the franchise can take advantage of this.
  5. Operating and structural control: Total assistance is provided in maintaining the quality, evaluation of the suppliers and in day to day operations of the franchise.

The following are the benefits for the franchisor.

  1. Quick expansion: Through franchising, the business can expand quickly with less capital. It takes significant effort if the business wants expand itself. A business can start multiple franchiese in multiple cities simultaneously.
  2. Cost advantages: The franchisor can purchases the supplies in bulk at wholesale prices. If the business is producing the necessary supplies they can take advantage of mass production and reduce costs. Even the expenses like the costs incurred in advertisement etc are born by all the franchises and hence this reduces the overall cost burden on the business.

Give an elaborated overview of the different types of mergers.

They following are the different types of mergers

  1. Conglomerate: When two companies which are in entirely different businesses merge, it is called as conglomerate. It is further classified as
    1. Pure conglomerate: In this the two firms have nothing in common.
    2. Mixed conglomerate: In this the two firms are looking for product or market extensions.
  2. Horizontal merger: When two companies which are in the same industry merge, it is called as horizontal merger. It occurs between companies that are competitors in the same industry and are offering the same goods or services. This type of merger usually occurs in the industries where there are few competitors and the competition is high. When these industries merge they’ll have much bigger synergies and potential gains.
  3. Market extension merger: This occurs between two firms that are offering the same products but in different market regions. The motive behind this type of merger is to make sure that the merging companies will be able to operate in a bigger market and there by getting huge number of clients.
  4. Product extension merger: This type of merger occurs between two companies that offer the products that are related to each other and operating in the same market. The merger helps to group the products together and reach a huge client base. It increases the profit margins too.
  5. Vertical merger: This occurs between two companies which are producing different goods or services for one specific finished product. It occurs when two or more firms that offer products which are part of an industry’s supply chain merge their operations. The purpose of merger is to increase synergies created by the merging entities and operate more efficiently as a single business unit.

What are the various possible reasons that cause failure of mergers and acquisitions?
The following are the various possible reasons that cause failure of mergers and acquisitions.

  1. Unrealistic price paid for the target: Before the merger or acquisition take place, the target company is thoroughly valuated. When this valuation is over-estimated, it results in the company acquiring to bear the additional burden of the overpricing. This is not visible immediately. The losses surface up over the later years.
  2. Difficulties in cultural integration: There may be cultural differences in both the companies and these need to be dealt with in a very sensitive manner. If not done tactically, this might result in a disaster. This effect is more prevalent when both the companies are from different countries. The differences will become dominant over the years and can even result in the failure of the merger.
  3. Overstated synergies: The purpose of mergers and acquisitions is to create synergies through
    1. increased revenues
    2. reduced costs
    3. reduction in networking capital
    4. improvement in the investment intensity

    If these factors are overestimated, it leads to failure of the mergers.

  4. Integration difficulties: During integration, new challenges come up. To tackle these, the company prepares the plans. When the issues have inadequate or inaccurate information, the integration will be difficult.
  5. Poor business fit: When the products are services of the merging business do not fit into the acquiring business’s overall business plan, the effective and efficient integration is delayed and subsequently fails.
  6. Inadequate due diligence: Due diligence is very critical for the merger and acquisitions. When sufficient information is not available to detect financial and acquisitions it leads to failure.
  7. High leverage: When the finance for acquiring is borrowed from market, it creates high leveraged structure and increases the amount of interest to be born by the company. This increased interest might be so huge that it eats up the profits and defeats the intention of acquisition.
  8. Boardroom split: When there is re-alignment of power among the members of the board room, few members from both the business units might have differences of opinion. This leads to clashes and may delay or prevent the integration.
  9. Regulatory issues: When the merger is against the consent of any of the stakeholders, they might create legal obstacles that might result in regulatory delay and in such cases there is more risk of deterioration of the business.
  10. Human resources issues: The mergers might cause job losses, restructuring and implement a new corporate culture and identity. This might affect the employees psychologically in a negative manner. When the companies are more busy with the legal and financial considerations and neglect HR issues, it will impact the employees morale and productivity.

Explain the concept of moving up the value chain with example.

Value Chain refers to all the activities that create and build value at every step. Thus the total value added to the final product or service is the sum of the individual value added at every step. As per Michael Porter value chain refers to the higher level model of

  1. How the business procures the raw materials
  2. Add value to the raw-materials through various processes
  3. Sell the finished products or services to the end users.

Thus value chain analysis is performed at every step of the business with one goal of delivering maximum value, from getting raw-materials to end users.
Michael Porter suggested that the activities in an organization should add value to the products and services. And all these activities should be run optimum level. Then only the organization can achieve true competitive advantage. When these processes are run efficiently, the value delivered far exceeds the cost incurred in adding the value. This leads to customer satisfaction and encourage customers to do the business with the organization again and again.

As per Michael Porter, the activities within an organization should be split into primary and support activities as follows.

  1. Primary Activities:

    1. Inbound Logistics
    2. Operations
    3. Outbound Logistics
    4. Marketing and Sales
    5. Services
  2. Support Activities:

    1. Procurement
    2. Technological Development
    3. Human Resource Management
    4. Firm Infrastructure

Example:Consider the example of a fast food restaurant. Their inbound logistics involve procuring the flour, vegetables etc. They’ll process them and make the final food items. The food items are then delivered to the customers. Enough marketing is made to ensure that customer is aware of the product. As part of service, discounts are offered for returning customers.

The secondary activities involve procuring the best raw materials at the best price. Use modern technology equipment (micro wave oven, electric baking equipment etc)in the preparation of food and make sure that it is available online to the customers (most of the pizza centers have a website). They should make their staff well trained to provide satisfactory customer service. They will also maintain good finances and management

Diagrammatically explain the Michael Porter’s Generic Value Chain.

Value Chain refers to all the activities that create and build value at every step. Thus the total value added to the final product or service is the sum of the individual value added at every step. As per Michael Porter value chain refers to the higher level model of

  1. How the business procures the raw materials
  2. Add value to the raw-materials through various processes
  3. Sell the finished products or services to the end users.

Thus value chain analysis is performed at every step of the business with one goal of delivering maximum value, from getting raw-materials to end users.
Michael Porter suggested that the activities in an organization should add value to the products and services. And all these activities should be run optimum level. Then only the organization can achieve true competitive advantage. When these processes are run efficiently, the value delivered far exceeds the cost incurred in adding the value. This leads to customer satisfaction and encourage customers to do the business with the organization again and again.

The following is the diagrammatic representation of porter’s value chain.

Porter’s Generic Value Chain
 
Inbound
Logistics
Operations Outbound
Logistics
Marketing
&
Sales
Service
 
Infrastructure
HR Management
Technology
Procurement

As per Michael Porter, the activities within an organization should be split into primary and support activities as follows.

  1. Primary Activities:

    1. Inbound Logistics: Procure the goods from suppliers and use them in producing the end products.
    2. Operations: Raw materials and goods are manufactured into the final product. Value is added as the product moves through the production line during this process.
    3. Outbound Logistics: It deals with the distribution of the finished goods to
      1. Customers
      2. Distribution centers
      3. Retailers
      4. Wholesalers
    4. Marketing and Sales: Establish an effective strategy using marketing mix to target the product to the appropriate customer group. The competitive strategy is clearly communicated to the target group through the promotional mix.
    5. Services: Post sales, there will be support services in the form of
      1. Sales Training
      2. Guarantees
      3. Warranties
  2. Support Activities:

    1. Procurement: Sourcing the best quality raw materials at the best price within budget.
    2. Technological Development: Using the technology to gain competitive advantage. The technology is used in
      1. Availability of the products on the internet so that the customers can access the firm 24/7.
      2. Cost reduction to create value addition
      3. Develop new products through research and development
      4. Production
    3. Human Resource Management: Recruit, train and develop suitable personnel to run the business successfully. The employees should stay motivated and compensated as per the market value if they should continue with the organization and add value.
    4. Firm Infrastructure: The infrastructure such as finance, legal structure and management should be efficient to help the organization realize its goals. If the infrastructure is inefficient it will lead to bad reputation, fines and sanctions.





What are the requirements for value chain management?

The following are the six requirements that are needed to manage the value chain.

  1. Coordination and Collaboration: Coordination and collaboration is essential to increase the efficiency of an organization. To eliminate the duplication of efforts, the work groups need to coordinate with each other. Organizations should use the theory that The whole is greater than the sum of its parts. It can be implemented when one group collaborate with the other work groups and individual to achieve a common goal.
  2. Technology Investment: Technology plays significant role in manufacturing and distribution. When the organization uses out dated technology such as old machinery or computers, it loses the competitiveness as the productivity will be drastically reduced.
  3. Organizational Process: Each aspect of an organizational process is identified. The processes are improved through the use of better technology, increased procedural knowledge. This will help in present and future success of the company.
  4. Leadership: When the leaders are strong it results in the successful implementation of value chain management. Good leaders exhibit sound management practices and there by earn the respect from their employees. Strong leaders will be efficient in conflict management, motivation and providing direction.
  5. Employee/Human Resources: For efficient functioning of the organization, it is essential to have good information on benefits, company policies, hiring and conflict management. When the human resources department is knowledgeable and active, the employees feel secure. In situations where the employee is hesitant to reach their supervisors directly regarding any issues, the human resources department can act as a liaison.
  6. Organizational culture and attitudes: To attract and retain top talent, the organizations should foster strong cultural identity with positive attitude. There should be regular corporate sponsored activities to help in the building of cultural unity and help the employees to develop a positive attitude. This also increases productivity.

What is the type of merger in which two firms which are engaged in totally unrelated business activities is merged?

Business firms that are totally unrelated activities merge to form a conglomate.

In which type of merger the companies in the same industry merge together?

In horizontal merger two companies in the same industry merge together.

In which type of merger two business firms that deal with same products but in different market sectors are merged together?

In marketing extension merger, two business firms that deal with the same products in different market sectors are merged together.

What do you call a merger that takes place between two business organizations that deal in products that are related to each other and operate in the same market?

Product extension merger is the one that takes place between two business organizations that deal in products that are related to each other and operate in the same market.

What is the merger that takes place between two business firms that deal with different goods or services for the same finished product?

Vertical merger is the one that occurs between two business firms that deal with different goods or services for the same finished products.

The company AAAAA which is in the business of manufacturing shoes 👞 takes over another company BBBBB which is also in the business of manufacturing shoes 👟 but at small scale. What could be the motive of AAAAA to take over BBBBB?

In this case a horizontal merger has taken place between AAAAA and BBBBB. The motive of AAAAA to horizontally merge BBBBB into it could be any of the following:

  1. AAAAA want to gain competitive advantage
  2. Increase synergies and potential gains in market share
  3. AAAAA want to create a new bigger organization with increased market share.
  4. To join certain operations such as manufacturing and there by reducing the cost.

ABABAB company is in the business of producing pencils ✏. They would like to increase their operations to sell notebooks 📓 and paper 📑. Briefly explain what the company is trying to do.

Here the company ABABAB is trying to achieve product diversification. This is usually achieved by changing existing products or adding new products to the company’s portfolio of the products. Companies go for diversification to achieve the following benefits.

  1. Survival: If the demand drops for one product they have other products that cover the gap. Thus the risk is reduced.
  2. Regulate the income: When the demand for products is seasonal, it helps to achieve business throughout the year. Thus with diversification the income flow is assured during various seasons.
  3. Growth Strategy: Product diversification helps the business to capture other markets and even up-sell their products.
  4. Reduce costs: The costs in various departments can be reduced. For instance the sales persons marketing the pencil will also market the paper/notebook and there by the average cost of marketing is reduced.
  5. Brand Image: The brand image/reputation/good will established in selling pencils can be utilized in selling the paper or notebooks easily.

Need more material?



You might also want to refer the following pages.
Books & Other Material

  1. Entrepreneurial Opportunity
  2. Entrepreneurial Planning
  3. Enterprise Marketing
  4. ‎Business Arithmetic
  5. ‎Resource Mobilization