Unit 5

Question 1

organic expansion

Answer 1

occurs when the business expands gradually over time using its own resources

Question 2

methods of organic expansion

Answer 2

1. growing sales
2. licensing
3. franchising

Question 3

franchising

Answer 3

a business (franchisor) agrees to let another business (franchisee) use its name, logo and business idea in return for a fee and a percentage of profits. the franchisee is trained how to operate the business and they must adhere to strict guidelines laid down by the franchisor

Question 4

advantages of franchising (franchisor)

Answer 4

1. low capital investment (as money used for expansion provided by franchisee)
2. rapid expansion (capital from franchisees can be used to set up more outlets)
3. low risk: franchise contract can be cancelled if franchisee does not adhere to rules or is underperforming -> protect rep.
4. economies of scale: discounts from bulk buying
5. owner rather than manager: owner (franchisee) more motivated to make the business succeed

Question 5

disadvantages of franchising (franchisor)

Answer 5

1. loss of control: (for day to day management + difficult to monitor businesses)
2. damage to reputation (damage of entire franchise could be damaged by the actions of one franchisee)
3. franchisee training (expensive)
4. franchisees must be monitored regularly -> expensive and time consuming

Question 6

advantages of franchising (franchisee)

Answer 6

1. franchise support (e.g. marketing, human resource management, finance training)
2. advertising/promotion increases consumer awareness
3. less risk of failure as franchise model has already proved successful
4. strong reputation makes it easier to make profit when starting out e.g. mcdonald’s

Question 7

disadvantages of franchising (franchisee)

Answer 7

1. cost (very expensive, some cost >100,000 e.g. mcdonald’s
2. must pay percentage of revenue to franchisor
3. must follow strict rules -> little scope for innovation or change unless introduced by the franchisor