2.1 growing the business

Question 1

Reasons why Businesses grow

Answer 1

• Owners/shareholders desire higher levels of market share and profitability
• The desire for stronger market power (monopoly) over its customers and suppliers
• Desire to reduce costs by benefitting from lower unit costs as output increases e.g suppliers offer bulk order discounts
• Growth provides opportunities for product diversification
• Larger firms often have easier access to finance

Question 2

Internal (Organic) Business Growth

Answer 2

Organic growth is growth that is driven by internal expansion using reinvested profits or loans.

Question 3

examples of how Organic growth (internal) is usually generated

Answer 3

Organic growth (internal) is usually generated by:

• Product diversification - may involve Introducing new products – e.g. through research, development and innovation
• Opening a new store
• International expansion (new markets)
• Investing in new technology/production machinery

Question 4

Pros of Internal (Organic) Growth

Answer 4

• The pace of growth is manageable
• Less risky as growth is financed by profits and there is existing business expertise in the industry
• The management knows & understands every part of the business

Question 5

Cons of Internal (Organic) Growth

Answer 5

• The pace of growth can be slow and frustrating
• Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to
• Access to finance may be limited

Question 6

External (Inorganic) Business Growth

Answer 6

Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others
Integration in the form of mergers or takeovers results in rapid business growth and is referred to as external or inorganic growth

Question 7

merger

Answer 7

A merger occurs when two or more companies combine to form a new company
The original companies cease to exist and their assets and liabilities are transferred to the newly created entity

Question 8

takeover

Answer 8

A takeover occurs when one company purchases another company, often against its will
The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations

Question 9

why would companies pursue mergers and takeovers

Answer 9

• Strategic fit - A company may acquire another company to expand into new markets, diversify its product offerings, or gain access to new technology
• Lower unit costs - Larger companies are able to achieve lower unit costs as they receive many benefits from being large (e.g. bulk purchase discounts on supplies and better interest rates from banks on loans)
• Elimination of competition - Takeovers are often used to eliminate competition and the acquiring company increases its market share. E.g. Meta, the parent company of Facebook purchased WhatsApp in 2014 and continued to run the messaging service alongside their own Facebook Messenger
• Shareholder value - Mergers and takeovers can also be used to create value for shareholders. By combining companies, shareholders can benefit from increased profits, dividends and higher stock prices

Question 10

Forward vertical integration

Answer 10

Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain
E.g. A dairy farmer merges with an ice cream manufacturer

Question 11

Backward vertical integration

Answer 11

Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain
E.g. An ice cream retailer takes over an ice cream manufacturer

Question 12

vertical integration

Answer 12

refers to a merger/takeover of another firm in the supply chain/ different stages in the production process

Question 13

horizontal integration

Answer 13

a merger/takeover of another firm at the same stages in the production process - e.g. ice cream manufacturer buys another ice cream manufacturer

Question 14

Vertical Integration
(Inorganic growth) - pros

Answer 14

• Reduces the cost of production as middleman profits are eliminated
• Lower costs make the firm more competitive
• Greater control over the supply chain reduces risk as access to raw materials is more certain
• The quality of raw materials can be controlled
• Forward integration adds additional profit as the profits from the next stage of production are assimilated
• Forward integration can increase brand visibility

Question 15

Horizontal Integration
(Inorganic growth) - pros

Answer 15

• Reductions in the cost per unit due to receiving more beneficial terms for bulk purchases
• Reduced competition and increased market share allowing a business to have more security and to possibly increase prices
• Existing knowledge of the industry means the merger is more likely to be successful
• The two businesses may allow a transfer of knowledge, skills and/or technology; goods and services can be shared

Question 16

Vertical Integration
(Inorganic growth) - cons

Answer 16

• There may be unnecessary duplication of employee or management roles
• There can be a culture clash between the two firms that have merged
• Possibly little expertise in running the new firm results in inefficiencies
• The price paid for the new firm may take a long time to recoup
• If a business grows too large or too quickly it may become inefficient in terms of management, communication and worker motivation

Question 17

Horizontal Integration
(Inorganic growth) - cons

Answer 17

• Unit costs may increase for example due to unnecessary duplication of management roles
• Resentment and clashes of culture may occur between different businesses - may reduce the effectiveness of the merger or takeover
• Possible redundancies - especially at management level, which can reduce motivation

Question 18

5 Factors Which Cause Business Objectives to Evolve

Answer 18

• Market conditions
• Technology
• Performance
• Legislation
• Internal reasons

Question 19

Factors Which Cause Business Objectives to Evolve - Market conditions

Answer 19

Market conditions such as competition, demand, and changing consumer price sensitivity can have a significant impact on a business’s aims and objectives

e.g. Uber and Lyft were initially focused on capturing the largest share of the ride-hailing market (market share)

As competition intensified, both companies shifted their focus to profitability, and their objectives changed accordingly (profit maximisation)

Question 20

Factors Which Cause Business Objectives to Evolve - Technology

Answer 20

A business may shift its focus from traditional brick-and-mortar retail to online retail as technology allows for a more cost-effective way to reach customers

Amazon began as an online bookstore, but as technology advanced, it expanded into a wide range of retail categories such as electronics, clothing and groceries

Their objective changed from increasing market share to market development

Question 21

Factors Which Cause Business Objectives to Evolve - Performance

Answer 21

If a business is not meeting its sales goals in on area, it may change its objectives to try an improve its financial performance

In some cases this may involve retrenchment (moving out of existing markets)

In 2018 Ford announced that it was shifting its focus away from producing passenger cars and focusing more on SUVs and trucks

The move was driven by the company’s poor financial performance and the new objectives were aimed at improving sales and profitability

Question 22

Factors Which Cause Business Objectives to Evolve - Legislation

Answer 22

A company may need to shift its focus to comply with new regulations or capitalise on new opportunities created by changes in legislation

Question 23

Factors Which Cause Business Objectives to Evolve - Internal reasons

Answer 23

Factors such as changes in management or the company culture can also influence a business’s aims and objectives

In 2014 Microsoft appointed Satya Nadella as the company’s CEO
He shifted the company’s focus from software to cloud services and the company’s objectives changed accordingly

Question 24

how business aims and objectives often evolve

Answer 24

Focus on survival or growth

A startup may initially aim to survive by breaking even and becoming profitable
As the company grows and becomes more established its objective may change to focus on growth
This may include expanding into new markets or investing in new products or services

Entering or exiting markets

A company may decide to enter a new market to expand its customer base or to diversify its products/services
Conversely, a business may decide to exit a market if it is not profitable

Growing or reducing the workforce

A growing company may need to hire additional employees to support its expansion
Conversely, a company may decide at any point to reduce its workforce to cut costs or streamline operations

Increasing or decreasing product range

A company may choose to increase its product range to expand its customer base or to stay competitive in the market
Alternatively, a company may decide to decrease its product range if certain products are not proving to be profitable

Question 25

Public limited companies (plc)

Answer 25

Most of the largest businesses in a country will be public limited companies.
Public limited companies are complicated and expensive to set up, but this type of company can raise large sums of money through listing its shares on a stock exchange.
The trading of shares this way, can make the company vulnerable to a possible takeover. This could mean that the original owners/shareholders of the company lose control, if they end up holding less than 50% of the shares.

Question 26

Public limited company - Advantages

Answer 26

Limited liability – protects the personal wealth of the shareholders
Can raise large sums of finance via the stock exchange. This finance is permanently invested and therefore does not need to be paid back
Stable form of structure – business continues to exist even when shareholders change
Firm is more prestigious

Question 27

Public limited company - disadvantages

Answer 27

Shareholders may not agree with how the profits have been distributed or undistributed by the board of directors
Flotation on the stock market is costly
Greater administrative costs
Finance can be limited by the stock market valuation of the company
Public can see company information and accounts
Risk of company being taken over

Question 28

Types of finance available for a growing business

Answer 28

External:
Stock market flotation
Share capital
Loan capital
Internal:
Retained profit
Sale of assets

Question 29

Internal – Retained profit

Answer 29

Retained profit is the most important source of finance for an established, profitable or growing business.

When a business makes a net profit, the shareholders have a choice: either extract it from the business, by way of a dividend, or reinvest it by leaving profits in the business. In a plc, the board of directors will make these decisions.

Question 30

Internal – Retained profit - pros

Answer 30

• A cheap form of finance, as no interest has to be paid
• Flexible – shareholders or the board of directors in a plc will have complete control over the proportion that is kept in the business for reinvestment and the amount that is paid out in dividends
• Retained profits do not dilute or reduce the ownership of the organisation; for companies, there is no risk of a takeover

Question 31

Internal – Retained profit - cons

Answer 31

• If a business needs some temporary finance because it is facing difficulties, then it is unlikely to have any profits that it can use
• Growth may be slow if it is dependent on retained profits, as profits may not be high enough to finance the growth quickly
• Using too many profits in the business, may upset shareholders who may feel that their dividend payments are too low

Question 32

Internal – Selling unwanted assets

Answer 32

Selling spare or unwanted non-current assets, such as spare land, buildings, machinery or equipment that are no longer needed by the business, can result in extra finance being generated on an one off basis.

Question 33

Internal – Selling unwanted assets - pros

Answer 33

Using this method will mean that no finance needs to be repaid and the business owners keep full control of the organisation

Question 34

Internal – Selling unwanted assets - cons

Answer 34

It is unlikely to be a long-term solution for most businesses that need to raise finance, as money will be raised on an one-off basis
It reduces the value of the business, as the business will no longer own these assets
When selling the asset, it is unlikely that the business will gain the value that it originally paid for it, due to depreciation

Question 35

External – Bank loan

Answer 35

A loan is an amount of money borrowed for a set period with an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan, as well as the rate of interest.

Question 36

External – Bank loan - pros

Answer 36

Guaranteed the money for a certain period - generally three to ten years
No need to provide the bank with a share in the business, so no control is lost
Interest rates may be fixed for the term, making it easier for the business to forecast interest payments and cash flow
Repayments are made in instalments, meaning the business can access substantial amounts of cash that does not need to be paid back in one-go

Question 37

External – Bank loan - cons

Answer 37

Time consuming - a business would need to apply for the loan
Security - normally has to be given to the bank on some of the assets of the business; the bank will have control over these assets if the business fails
Lack of flexibility - a business might take a loan out for £500,000, but finds it only needed £300,000; interest must be paid on the full loan amount, which increases the costs of the business

Question 38

External – Bank overdraft

Answer 38

As a business gets bigger and its financial commitments increase, it often finds that its overdraft facility will also need to grow. For example, a growing business may allow customers trade credit when purchasing stock, which would therefore impact on their cash flow.

Question 39

External – Bank overdraft - pros

Answer 39

The big advantage of a bank overdraft is its flexibility. If a business experiences a short-term shortage of cash or an unexpected cost, then it can be paid by using some of the overdraft facility.
Interest is only paid on the amount used.

Question 40

External – Bank overdraft - cons

Answer 40

An overdraft is repayable to the bank at any time. A business may have an overdraft facility of £100,000 i.e. it can owe the bank up to that amount, but the bank may lower or even withdraw that facility if it feels this action is necessary. This happened to numerous businesses with bank overdrafts during the credit crunch of 2007-8, many of which were relying on their overdrafts to stay in business.
Usually have high levels of interest attached to them, making them an expensive form of finance when they are used.

Question 41

External – Share capital

Answer 41

Private limited companies can raise finance by selling its shares to friends and family.

However, when a privately owned company reaches a certain size, it may consider selling its shares on a stock exchange. When a business offers its shares for sale for the first time to the general public by listing them on a stock exchange, this is called FLOTATION. This process will allow the business to raise large amounts of funds in the form of share capital that are not repayable.

An existing plc can also raise additional share capital by issuing new shares for sale on the stock exchange.

Question 42

External – Share capital - pros

Answer 42

Large sums of money can be raised
Capital does not have to be repaid
There is no interest – dividend payments can be missed if profits are low

Question 43

External – Share capital - cons

Answer 43

Possible loss of control if the original owners sell more than 50% of the total shares
Need to satisfy shareholders expectations of dividends and share price growth
Can be costly and time consuming (particularly flotations)

Question 44

Stock market flotation

Answer 44

Stock market flotation is an expensive way of raising new capital because of the costs involved in the sale of the shares.

As a result of a flotation the shareholder base of the company becomes much wider; potentially many thousands of private shareholders invest in the business alongside the larger “institutional” investors, such as pension and insurance scheme funds.

Question 45

ethics

Answer 45

Where businesses make decisions based on what is morally right rather than what is more profitable

Question 46

pros of behaving ethically

Answer 46

• Higher revenues – customers are increasingly making purchasing choices based on ethics, with the actual selling price charged being less important in their decision-making
• Improved brand/business awareness and recognition
• New sources of finance are possible, for example from ethical investors

Question 47

cons of behaving ethically

Answer 47

Higher costs, for example sourcing from Fairtrade suppliers rather than from suppliers offering the lowest prices
Higher overheads, such as training & communication of ethical policy
A danger of building up false expectations amongst consumers
Bad publicity if business is found to be acting “unethically”

Question 48

Environmental considerations

Answer 48

Over recent years, there have been increasing concerns about the environment. The number of UK laws on business regarding the environment have increased dramatically.
Areas such as pollution, disposal of waste linked to recycling and energy use all increase business costs, as firms must meet these new standards. In some cases, this increase in costs can be passed onto the consumer in the form of higher prices.
Consumers will expect to pay a higher price for goods and services that have been produced in a more environmentally friendly way, for example higher prices can be charged for organic products.

Question 49

pros of behaving in an environmentally friendly way

Answer 49

Provides good publicity and meets the requirements of environmental laws.
Customers may be willing to pay higher prices.

Question 50

cons of behaving in an environmentally friendly way

Answer 50

Costs increase as the business has to pay more for waste disposal and to meet the requirements of anti-pollution laws.

Question 51

Pressure Group Activity and the Marketing Mix

Answer 51

Pressure groups are organisations that seek to influence public policy or business practices.
They use a variety of tactics to achieve their goals - E.g. Greenpeace is a pressure group that campaigns for environmental issues and it has targeted companies like Nestle for using unsustainable palm oil
In response, Nestle has committed to sourcing sustainable palm oil but this has impacted the company’s marketing mix
Nestle has had to change its packaging and labelling to reflect its commitment to sustainability and it has had to spend money on advertising campaigns to communicate this message to customers

Question 52

What is globalisation?

Answer 52

Globalisation is the free movement of goods, services, people, capital, information and technology, enabling businesses to sell their products anywhere in the world.
This boosts the economic integration of different countries.

Question 53

Benefits of globalisation

Answer 53

• Expanded Market Access - Globalization enables businesses to reach a broader customer base by entering new markets in multiple countries. This helps businesses reduce reliance on a single market. This diversification can mitigate risks associated with economic downturns or fluctuations in specific regions and it can lead to an increase in revenue
• Increased Competition and Efficiency - Globalization intensifies competition, compelling businesses to enhance efficiency and productivity. This competitive pressure often leads to improved processes and innovation with cheaper prices.
• Access to Resources and Talent - Globalization allows businesses to Access to cheaper labour and raw materials from other countries. This can lead to cost savings and improved product quality.
• Innovation and Knowledge Transfer - Businesses operating globally can benefit from the exchange of ideas, technologies, and best practices, promoting continuous improvement.

Question 54

Drawbacks of globalisation

Answer 54

• Increased Competition - Globalization exposes businesses to intensified competition from both domestic and international rivals. This can lead to pressure on prices, reduced profit margins, and the need for continuous innovation to stay competitive.
• Supply Chain Vulnerability - Relying on global supply chains makes businesses vulnerable to disruptions caused by events such as natural disasters, geopolitical tensions, or global health crises. These disruptions can lead to delays, increased costs, and supply shortages.
• Impact on Local Economies - Globalization can result in the outsourcing of jobs to countries with lower labor costs, potentially leading to unemployment and economic challenges in the business’s home country. This may also raise ethical concerns.
• Currency Exchange Risks - Engaging in international trade exposes businesses to currency exchange rate fluctuations. This can impact the cost of goods, profit margins, and overall financial performance, adding an element of financial risk.

Question 55

Imports

Answer 55

Imports are goods or services brought into one country from another.

Question 56

Exports

Answer 56

Exports are when goods and services produced by one country are sold to another country.

Question 57

Factors when assessing production location - Costs of production

Answer 57

Businesses want to keep costs of production low as this can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage

Question 58

Factors when assessing production location - Skills and availability of labour force

Answer 58

The quality of the workforce is important as this will directly impact the quality of the goods and services produced in an economy

Businesses may choose to locate production in a market where the labour costs are lower

Question 59

Factors when assessing production location - Natural Resources

Answer 59

It is often important that a business has easy access to their raw materials as this can help to reduce transportation costs and help to reduce any potential delays to the production process

Question 60

Factors when assessing production location - Return on investments

Answer 60

Assessing the return on investment in different markets will reduce the risk of the initial investment not being paid for

Question 61

Factors when assessing production location -Government Incentives

Answer 61

Businesses may be offered incentives (e.g. grants, business loans and tax breaks) by the government

Question 62

Factors when assessing production location - Location in a trading bloc

Answer 62

A business located in a market within a trade bloc will be able to access many advantages such as reduced protectionist measures
E.g. Japanese companies Nissan and Toyota have invested in manufacturing facilities in the UK (prior to Brexit) to gain access to the EU market

Question 63

Multinational Corporations

Answer 63

A multinational corporation (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries
E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries

Question 64

Advantages of MNCs

Answer 64

• The MNC can gain access to cheap labour and/or raw materials
• Producing closer to target markets may reduce transport costs (which will be important for bulky goods).
• Local residents may benefit from job opportunities and growth in the local economy
• MNCs often invest to improve infrastructure - Better roads, transportation and access to water and electricity would help the local community in addition to helping the MNC operate more efficiently
• MNCs may have to pay taxes and business rates to local councils/ authorities - These funds may be reinvested back into the local community

Question 65

Disadvantages of MNCs

Answer 65

• MNCs may cause damage to local habitats/environment during production process - E.g. Shell has a track record of oil pollution in vulnerable communities in Nigeria
• MNC’s may leave unsightly production facilities behind once they have extracted all of the resources and left the country

Question 66

Barriers to international trade

Answer 66

Barriers to international trade occur when a government imposes regulations to restrict the flow of international products into its country. This may be done through trade blocs or the introduction of tariffs or quotas on imported goods.

Question 67

Protectionism

Answer 67

Protectionism is when a government seeks to protect domestic industries from foreign competition

Question 68

tariff

Answer 68

A tariff is a tax placed on imported goods from other countries
E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%

A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses

Question 69

The benefits of tariffs

Answer 69

• They protect infant industries so they can eventually become more competitive globally
• An increase in government tax revenue

Question 70

The disadvantages of tariffs

Answer 70

• Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers
• Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers
• Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them

Question 71

Quotas

Answer 71

Quotas are a limit to the volume or value of specific imports allowed into a country in a given time period

Question 72

Trade Blocs

Answer 72

A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other

Three of the largest trading blocs include The European Union (EU), The Association of Southeast Asian Nations (ASEAN), and The North American Free Trade Agreement (NAFTA)

Question 73

The Impact of Trading Blocs on Business Activity

Answer 73

Businesses outside the trading bloc will face higher costs from protectionist measures such as tariffs and trying to meet legal requirements inside the trading bloc
This will make them less competitive when trying to sell goods to member countries within the bloc
Being outside the bloc is likely to decrease their sales volume to countries within the bloc

Question 74

benefits for businesses of belonging to a trading bloc

Answer 74

Access to more markets
* Businesses are able to sell to more customers due to free movement of goods

**External tariff walls **
* An external tariff wall is a tax applied to imported goods from outside the bloc
* This protects businesses within the trading bloc from competition from businesses outside of the trading bloc

Infrastructure support
* Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries inside the trading bloc

**Free movement of labour **
* Trading blocs may also have free movement of labour allowing businesses to source workers from a wider pool
* A higher supply of labour may push wages lower, leading to reduced costs for business
* E.g. Citizens of EU countries have the right to work in any Member State and to be treated equally as citizens of that State

Question 75

drawbacks to businesses of belonging to a trading bloc

Answer 75

Increased competition :
* There is increased competition for businesses within the trade bloc which may be more of an issue for small businesses as they have less resources available with which to compete
* Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc

Common rules and regulations
* In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to
* E.g. The EU working time directive states that employees can only work a maximum of 48 hours per week

Retaliation
* External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries

Inefficiency
* Although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside of the bloc. This may reduce the incentive of businesses to be more efficient
* Trading blocs also lead to trade diversion which means trade is taken away from efficient producers who operate outside of the trade bloc and replaced by trade within the bloc

Question 76

Considerations for Businesses when adapting their marketing mix to compete internationally

Answer 76

Unintended meanings can arise when businesses use images, symbols, or language that have different connotations in different cultures
E.g. The colour white symbolises purity and innocence in Western cultures, but it represents death and mourning in some Asian cultures

Businesses must ensure that their marketing messages are translated accurately and appropriately - This involves understanding language nuances and idioms:
E.g. When KFC entered the Chinese market, it translated its slogan “Finger-Lickin’ Good” into Chinese as “Eat Your Fingers Off”, which had negative connotations in the Chinese culture