Intro to Business Lesson 4.4.1

Lesson 4.4.1- Growing as a Business

Intro to Business
Unit 4: Business Success
Topic 4: Unit Review and Test

Vocabulary:

Franchise-A business arrangement where a fee is paid to operate a business under the name and system of an existing company.
Horizontal Integration-When a business grows by acquiring other businesses similar to itself.
Scaling-taking steps to grow a business
Vertical Integration-When a business grows by acquiring the types of businesses it works with to get supplies, make its product, and sell to its customers

Poll

True or False: If a business increases sales it will always increase its profit.

• True

• False

​Scaling

Scaling a business means taking steps to grow it.

A goal for most businesses is to continue to grow their total sales and profits.

The general assumption is that if a business increases its sales, it will also increase its profit. But that is not always the case.

Sales, but No Profits

A business making more money in total sales does not necessarily mean that its profits have gone up.

Say that a company that makes ground coffee has decided it can only sell as many bags of ground coffee as it can make. They are selling out of all the bags of coffee they can produce in their factory, but their factory is now too small to make any more products. 
In order for this company to scale, it needs to move into a larger factory space and spend more money on equipment.

When they do this, they have really increased their expenses for the company.

Even though in the following year they will be able to make and sell more bags of coffee, they are likely to profit less because of all the costs they were faced with.

This company is hoping to grow sales in future years to offset the costs incurred.

Profits, but No Sales

Just because a business made more money does not necessarily mean that it had more sales.

Say that the same coffee ground business did not want to scale up production and incur all those new expenses.

Since the coffee shop was at capacity for how much it could make, the owners decided to create a more luxurious brand of coffee bean flavors and sell them at a higher price instead.

  This way, the business was still maintaining the same production level, but it was able to increase the money it made instead of increasing costs.

Multiple Choice

A coffee company increased their marketing expenses $300,000 for social media marketing, TV and radio ads.

Over the course of the next 6 months, sales increased by 15% up $100,000 from the previous half of the year.

Why could this be a problem for the business moving forward?

• Expenses were more than sales leading to a decrease in profit

• Sales are greater than expenses

• Sales were more than expenses leading to a net profit

Lego's Struggle to Make Money

There are many decisions a business can make in order to help grow both its sales and profits. A lot of businesses default to scaling up and becoming larger. They think that the more you sell, the more you will profit, which means your business has to grow bigger and bigger. 

In the 1990s, Lego decided that scaling its business was the best way to compete with the new electronic toys of the time. The largest expansion was to its several theme parks. Although they had many visitors who spent good money on ticket prices, games, and merchandise, the parks were losing money. The company was an expert at manufacturing toys, not running theme park operations. 

Because of this, Lego created more sales but did not see profits in the 1990s and 2000s. In fact, the company was losing money.

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Multiple Select

What are two reasons Lego sold off most of its ownership of the Legoland Theme Parks?

• Lego realized lacked expertise in operating theme parks.

• Lego realized the theme parks would make much more money than the bricks

• Lego realized the theme parks were costing the business too much money to operate themselves.

Scaling Through Integration

The safest method for scaling a business is to do so slowly and use existing profits.

Companies will take the money they earn and invest that money back into the business to slowly build up the next step for creating more or better products and services.

 There are, however, many methods businesses can use in order to scale quickly and successfully.

 A big challenge for companies scaling fast is their existing competition.

When a business grows by acquiring the types of businesses it works with to get supplies, make its product, and sell to its customers

Vertical Integration

When a business grows by acquiring other businesses similar to itself.

Horizontal Integration

Types of Scaling through Integration

​Horizontal Integration for Lego	​Vertical Integration for Lego
​ If Lego were to do horizontal integration, it would buy out the other toy companies, such as Mega Blocks and TYCO, and either also sell their brick models or get rid of them altogether.	​If Lego were to do vertical integration, it would buy businesses that helped it get materials and sell products. This would be them buying businesses, such as their own trucking company, a Lego retail store, and a paint manufacturer.
​The positive is that Lego would be the only company that sells popular building blocks because it would cut out its competitors.	​The positive is that Lego would control the process and lower the price. If Lego can lower costs, it can also either (1) lower their prices so they are cheaper than their competitors or (2) stay at the same price as their competitors but profit more money than them.

Multiple Choice

A grocery store is looking to scale its business by buying up more companies.

Which of the following is an example of a horizontal integration for a grocery store?

• buying a cattle farm

• buying a meat market

• buying a trucking company

You create more product lines and services outside of what you typically create. The goal is that your brand is popular enough that your customers will want the new products and no longer buy them from competitors in the market

Expanding into New Markets

​A business arrangement where a fee is paid to operate a business under the name and system of an existing company. The owner of the franchise must follow the rules of the parent company, but the business is theirs. Franchising is a great way to expand your business quickly.

Franchise Your Brand

Growth can also come with handling more capacity. A company can do this by becoming more efficient with their operations.

Create More Efficiency

​Other Methods of Scaling

Multiple Choice

Which type of scaling allows a business to pass off all business operations to another business owner instead of taking it on themselves?

• 
  creating a franchise

• 
  expanding to a new market

• horizontal integration

​Fixing Lego's Growing Pains

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Multiple Select

What two things did Lego do to correct the mistakes it made in the 90s?

• Lego scaled back all of its growth.

• Lego only got rid of their theme parks.

• Lego slowed down as a business for them to recover.

Multiple Select

Disney recently purchased National Geographic, Marvel, and Fox.

Which two vocabulary words describe these purchases from Disney?

• 
  vertical integration

• 
  horizontal integration

• 
  scaling

What's Next?

Next Class: Monday, 4/27/26

Unit Review and Test

BE SURE TO COMPLETE THE REVIEW GAME BEFORE TAKING THE TEST!!

Poll

How well did you understand today's lesson?