2.1 Growing the Business Flashcards
2.1.1
Business Growth
Why would a business want to grow?
If a business grows, it can:
- benefit from economies of scale
- which means being able to provide more goods or services, making it cheaper to make each product
- benefit from a larger market share
- gain more recognition, customers, revenue and profit.
Growing a business
A business can grow organically (internally) or inorganically (externally).
Organic (Internal) Growth
Definition: When a business grows on its own.
How is it achieved: Through changing the marketing mix by:
- Taking existing products to new markets in the UK or overseas.
- Developing new products via:
- research and development
- taking advantage of new technology
- innovation - Becoming a public limited company (plc) by floating on the stock market.
Advantages:
- A business can maintain its own values without interference.
Disadvantages:
- Slower growth
Inorganic (External) Growth
Definition: When a business combines with another business to grow.
How is it achieved: Through a:
- Merger (when two businesses join together) or
- Takeover (when one business buys a smaller business)
Advantages:
- Rapid growth
- New shared resources/skills/customers
Disadvantages:
- Disagreements and communication problems
Finance Options for Growth
- Capital found from within a business is an internal source of finance
- Capital found from outside a business is an external source of finance
Internal Sources of Finance
This includes retained profit, selling of assets and the owner’s own savings.
Retained Profit
Definition: Using capital from profits kept from previous years of trading.
Advantages:
- Cheap
- Quick
- Convenient
Disadvantages:
- Might not have any retained profits or might need the funds for something else.
- Also, once the money is gone, not available for future unseen problems.
Sale of Assets
Definition: e.g. selling machinery or land
Advantages:
- Convenient
- Can create space for more profitable uses
- Can be quick
Disadvantages:
- Might not get the market value or even sell at all
- Might need the assets in the future
- It also looks desperate
Owner’s own savings
Advantages:
- Quick
- Convenient
- Cheap
Disadvantages:
- Might not have any savings or may need cash for private purposes
External Sources of Finance
This includes loan capital, share capital and stock market floatation.
Loan Capital
Definition: Lump sum of capital borrowed from a bank.
Advantages:
- Regular payments spread over a period of time assist with cash-flow management
- Often a bank manager gives financial advice
Disadvantages:
- Can take a while to be approved
- Might not qualify
- Interest applies, so can be expensive
- Often a bank will insist on collateral (security) being offered by a business in case the business fails to make loan repayments
Share Capital (also known as share issue)
Definition: When a business becomes a private limited company by offering shares in the business in exchange for capital.
Advantages:
- Does not need to be repaid
- No interest applies
- Business can share who to offer shares to
Disadvantages:
- Profits are paid to shareholders (known as dividends)
- Control of the business is diluted
Stock Market Floatation
Definition: When a business becomes a public limited company by offering shares to the public to buy.
Advantages:
- Can raise large amounts of capital as is easy for the public to buy shares via a stockbroker or bank
- Does not need to be repaid
- No interest applies
- Business becomes more recognised
Disadvantages:
- Complicated and expensive
- Loss of control as anyone can buy shares
- Profits are paid to shareholders (dividends)
- Business records are made public
- Some investors only buy shares to make a quick profit by selling them when the share price increases
2.1.2
Changes in Business Aims and Objectives
Why business aims and objectives change as businesses evolve
- Aims are long-term goals of a business
- Objectives are the short-term steps a business takes to realise those goals
- Over time, many businesses need to change their aims and objectives as the business evolves to adapt to changing circumstances
- When businesses evolve, they may find market conditions change and they need to be able to respond to these changes, e.g. the growth rate of the market (whether the market is becoming bigger or smaller) or how competitive the market is.
- The economic climate may also have an effect on market conditions, which affects consumer income, and in turn their levels of spending
- Consumer taste may change, e.g. an emphasis on recycling, which requires businesses to revisit their aims and objectives
- New technology brings innovation and businesses find they need to change their aims and objectives to remain competitive
- Often the previous performance of a business acts as a platform for setting new aims and objectives for the future - a successful business may change its aims and objectives to include future growth or a failing business will have to revisit its aims and objectives to include a change in direction, e.g. store closures and a renewed focus on website and deliveries instead
- Legislation often causes businesses to change their aims and objectives, e.g. a change in the law regarding food labelling has encouraged many businesses to adapt aims and objectives which promote public health awareness
- Sometimes business aims and objectives change in response to internal reasons, e.g. it could be that the original aim of the business is no longer applicable - when Marks & Spencer began in 1884 it was a penny bazaar stall, now it sells a wide range of goods and services nationally and internationally
How Aims and Objectives Change as Businesses Evolve
- Simple survival for a new business may change into the need to make a profit after its first year and to growth aims over a period of years.
- The business may have in its plans sales forecasts that require different aims and objectives for each year.
- A business may enter a new market to help it meet changed aims and objectives, e.g. Uber originally provided customers with the ability to call for transport when needed, now the business has entered the food home delivery market with UberEATS.
- Sometimes a business needs to exit a market to meet its aims and objectives, e.g. Tesco entered the American market but failed, this failure had a negative impact on their aims and objectives, so they decided to exit the US market.
- A business may need to change the size of its workforce over time to meet changing aims and objectives, e.g. the Post Office and many seasonal stores hire extra staff over the Christmas period to cope with extra customer demand for services.
- There may be times when a business has to reduce its workforce in order to meet its changing aims and objectives.
- Sometimes businesses need to change their product range to meet changed aims and objectives, e.g. many dairy farmers now produce cheese and yogurt products in addition to milk.
- Some businesses have reduced their product range to return to their core business in order to meet their aims and objectives.
2.1.3
Business and Globalisation
Globalisation and Business
- Globalisation is when organisations and businesses trade internationally.
- Exports are when a business makes products in the UK then sells them to other countries.
- The UK’s top exports are: pearls, gems, coins, oil and cars.
- Tourism is an export and is a major contributor to the UK economy.
- Imports are when products made overseas are brought into the UK.
- The top UK imports are: machines, vehicles and electronic equipment.
Changing Business Locations
- With globalisation, many UK businesses have relocated to low-cost locations overseas, e.g. Dyson vacuum cleaners are manufactured in Malaysia, where land and labour is cheaper.
- This type of relocation is known as offshoring; work is sent overseas to a host country that welcomes the operation of foreign businesses.
- Foreign businesses also relocate to the UK to manufacture here, e.g. Nissan, the Japanese car company, has a plant in the UK because it wants to make the most of British skilled labour and to benefit from being closer to their European customers, so they do not need to transport their cars all the way from Japan.
- Multinational companies (MNCs) are businesses that operate and trade in more than one country.
- MNCs benefit from lower production costs by operating in developing countries and by being closer to their customers in the host countries in which they operate.
- MNCs can avoid import restrictions if they operate in host countries. Examples of MNCs are Coca-Cola and Pepsi.
Barriers to International Trade
- Many governments worry that cheap imports make it difficult for their own country’s businesses to compete so they deliberately restrict opportunities, efficiency and competition for importers with trade barriers, such as tariffs.
- A tariff is a tax added onto the selling price of an imported good to make it more expensive to buy UK products.
- If imported products are more expensive for UK consumers, they are less likely to want to buy them (reducing demand) and are more likely to buy UK products.
- If the UK imposes tariffs on imported goods, if often follows that governments of other countries also impose tariffs on UK exports entering their country, which makes it expensive for our businesses to export.
- Trade blocs are when certain countries group together to make it easier for members to market goods, services, capital and labour by getting rid of all barriers to trade.
- Trade blocs tend to be close to one another geographically, e.g. the North American Free Trade Agreement (NAFTA), the European Union (EU).
How Businesses Compete Internationally
- Globalisation has created opportunities for Internet-based e-commerce businesses to sell to new markets; this means that businesses can use the Internet to buy and sell products anywhere in the world.
- Businesses do not even need to have their own websites or shops as they can use sites such as eBay to trade.
- Some businesses base their whole business model around e-commerce, such as Amazon.
- Websites even offer translation services so trading with consumers around the world becomes easier.
- Changes to the marketing mix can help a business to compete internationally, e.g. adaptation of products to suit local tastes, price amendments to take currencies into account, transportation arrangements, different promotional techniques.
2.1.4
Ethics, the Environment and Business
What are Ethics?
- Ethics are moral guidelines for good behaviour - doing what is morally right.
- When a business is ethical it pays a fair wage to its workers and ensures production does not harm the environment, animals or people.
