Reasons for expanding the enterprises:
A business enterprise expands its size in terms of the market share, sectors, products, etc. It means that a business organization, over a period of time, can be seen expanding, and the following are the major reasons for the expansion of an enterprise.
- To maximize the benefits from the economies of scale and economies of scope.
- To create monopoly power in the market by covering the possible size of the market.
- To maximize the benefits from the brand value, the brand name.
- To make efficient utilization of the available resources.
- To make labour division possible and promote specialization and cost saving.
- To diversify the risk through expanding business in different markets and products.
- To influence policy decisions as a large player in the market.
- To maximize the benefits from advanced cost-effective technology.
- To receive benefits and incentives from the government given to businesses of a certain size.
Approaches of Expansion
There are mainly three approaches to business expansion. They are:
- Horizontal Expansion of Business
- Vertical Expansion of Business
- Conglomerate Expansion of Business
Horizontal Expansion
If an enterprise expands its business at the same stage of the same value chain or the same industry, it is a horizontal expansion. For example, if a commercial bank establishes a new branch to offer the same services, it is a horizontal expansion of the business.
The horizontal expansion is made through increasing the capacity of the firm by adding more machines, equipment, human resources, etc.
Or by merging with the firm’s similar product line and the same stage of the value chain, or by establishing new branches of the firm. The rationale of the horizontal expansion is:
- Achieve economies of scale or reduce per-unit cost due to the large size of the business.
- Increase market share and customer base.
- Reduce competition by gaining market monopoly power.
- Broaden the product range.
- Strengthening the bargaining power.
- Benefits from the brand value.
- Better utilization of available resources.
- Benefits from the labor division.
- Risk minimization and diversification.
Vertical Expansion
If an enterprise expands its business in different stages of the same value chain, it is the vertical expansion of the business. Under such expansion, the enterprise integrates with upstream or downstream within the value chain.
For example, if a dairy starts the cow farm itself (upstream) or the dairy starts to make sweets (downstream), it is a vertical expansion.
The vertical expansion is made by acquiring the other enterprise of the upstream or downstream in the same value chain, or the enterprise itself starts a new business in the upstream or downstream in the value chain.
Rationale of vertical expansion of enterprise:
- Improves control over the inputs and other resources.
- Minimize the risk of depending on the supplier or distributor.
- Quality control of the product working through all the stages of the value chain.
- Maximize benefits from each stage of production.
- Increase the customer base and its retention.
- Maximize the benefits from the brand value.
- Risk minimization and diversification.
- Growth of the market and bargaining power.
Conglomerate Expansion
If an enterprise expands its business in the different value chain, it is an expansion by a conglomerate. In such expansion, the enterprise expands into unrelated sectors or industries by creating a diversified business group. For example, CG is a conglomerate that has expanded its business into a large number of unrelated sectors or different value chains, such as health, education, banking, real estate, and day-to-day consumer items, etc.
For example, IME Group, Golchha Organization, etc.
Rationale of conglomerate expansion
- Risk diversification by producing different products in different sectors.
- Building and utilizing the branch reputation.
- Better utilization of the available financial, technical, and human resources.
- Creation of monopoly power and a secure market.
- Benefits from economies of scale and scope.
- Labour division, specialization, and innovation.
- Cost reduction through resource sharing.
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