Expansion is one of the forms of internal growth in the business. It means enlargement or increase in the same line of activity. Expansion is the natural growth of a business enterprise taking place in course of time. In the case of expansion, the enterprise grows on its own without joining hands with any other enterprise. There are three common forms of business expansion.
Diversification is the most common form of internal growth in the business. As mentioned above, expansion has its own limitations to business growth. Diversification is evolved to overcome the limitations of business growth through expansion. A business cannot grow beyond a certain point by concentrating only on the existing product/market.
In other words, it is not always possible for a business to grow beyond a certain point through market penetration. This underlines the need to add the new products/markets to the existing ones. Such an approach to growth by adding new products to the existing product line is called ‘diversification’.
3. Joint venture:
The joint venture is a type of external growth strategy adopted by business firms. A joint venture could be considered as an entity resulting from a long-term contractual agreement between two or more parties, to undertake mutually beneficial economic activities, exercise joint control, and contribute equity and share in the profits or losses of the company.
The Reserve Bank of India (RBI) has defined a joint venture in the technical sense as: “a foreign concern formed, registered or incorporated in accordance with the laws and regulations of the host country in which the India party makes a direct investment, whether such investment amounts to a majority or minority shareholding.”
4. Mergers and Acquisitions (M&A)
Mergers and acquisitions are yet other forms of external growth strategy. A merger means a combination of two or more existing enterprises into one. For the enterprise which acquires another, it is called ‘acquisition.’ For the enterprise which is acquired, it is called ‘merger.’ Thus, merger and acquisition are the two sides of the same coin.
If both organizations dissolve their identity to create a new organization, it is called consolidation. The other terms used for M&A are absorption, amalgamation, and integration. M&A is more popularly known as takeovers. For more than three decades after Independence, the normal route of growth was through licensing and setting up new projects.
A sub-contracting relationship exists when a company (called a contractor) places an order with another company (called the sub-contractee) for the production of parts, components, sub-assemblies or assemblies to be incorporated into a product sold by the contractor. Such orders may include the processing transformation, or finishing of material or part by the sub-contractor at the request of the contractor.
In a sense, franchising is very much akin to branching. Franchising is a system for selectively distributing goods or services through outlets owned by the retailer or dealer. Basically, a franchise is a patent or trademark license, entitling the holder to market particular products or services under a brand name or trademark according to pre-determined terms and conditions.
David D. Settz has defined franchising as a “Form of business ownership created by contract whereby a company grants a buyer the rights to engage in selling or distributing its products or services under a prescribed business format in exchange for royalties or shares of profits. The buyer is called the ‘Franchisee’ the company that sells rights to its business concept is called ‘Franchiser.’
Thus, franchising can simply be defined as a form of contractual arrangement in which a retailer (franchisee) enters into an agreement with a producer (franchisor) to sell the producer’s goods or services for a specified fee or commission.