2.1 - Growing The Business

Question 1

What is internal growth?

Answer 1

When a business grows by expanding its own activities

Question 2

How is targeting new markets a method of growing internally?

Answer 2

When businesses aim to sell its products to people who it hasn’t tried to sell to before. They can use new technology, which may reduce its cost so it can lower its prices and sell to a low income market. They could also set up branches in other countries so they can directly sell in markets abroad. They could also change the marketing mix so it appeals to a new market.

Question 3

How is developing new products - a method of growing internally?

Answer 3

Selling a brand new product will increase sales for a business allowing it to grow. Firms need innovation in order to do this - this is when someone comes up with a new product or way of doing things, this is often the result of research and development.

Question 4

What is external growth?

Answer 4

This is inorganic growth which usually involves a merger or a takeover

Question 5

What is a merger?

Answer 5

When two firms join together to form a larger, new firm.

Question 6

What is a takeover?

Answer 6

When an existing firm expands by buying more than half the shares in another firm.

Question 7

What are the four ways that a firm can merge or takeover? (8)

Answer 7

> Join with a supplier - allows to control supply, cost and quality of raw materials
Join with a competitor - Gives the firm bigger market share so will be stronger competitor
Join with a customer - access to customers and more control over the price at which the products are sold to the end-user
Join with an unrelated firm - firm will expand by diversifying into new markets. Reduces risks on relying on a few products.

Question 8

What are the disadvantages of external growth? (6)

Answer 8

> Less than half of all takeovers and mergers are successful - hard to make different businesses work as one.
Mergers and takeovers create bad feelings, especially if the firm didn’t agree to be taken over.
Mergers and takeovers lead to cost-cutting. This cost-cutting may mean making lots of people redundant, so it can lead to tension and uncertainty among workers.

Question 9

What are the benefits of internal growth?

Answer 9

• Inexpensive
• Means that the firm expands by doing more of what it is already good at
• Slow growth so it is easier to make sure quality doesn’t suffer and new staff are trained well

Question 10

What types of firms are good for a growing business?

Answer 10

PLC - Public Limited Companies

Question 11

What are two internal sources of finance?

Answer 11

• Retained profits

- Selling fixed assets

Question 12

What is retained profit?

Answer 12

Profits that have been re-invested into the business after the owners have paid themselves a dividend. But larger companies are under pressure from shareholders to give large dividends, reducing the profit they can retain.

Question 13

How is selling fixed assets an internal source?

Answer 13

Firms can raise money buy selling assets that are no longer in use. There’s a limit to how many assets you can sell as you won’t be able to trade.

Question 14

How is loan capital an external source of finance?

Answer 14

Money is borrowed from a bank and the firm pays it back with interest. As security for the loan, assets are sold to pay it back. If a firm has proven that it is profitable, then it will be easier to get a loan.

Question 15

How is a share capital an external source of finance?

Answer 15

If a business become a limited company then it can raise money by selling shares. This finance doesn’t have to pay back the money unlike a load. However, the original owner will get a smaller share of the business’ profits and lose come control over the business.

Question 16

What is a PLC?

Answer 16

‘Public’ means that shares in the company are traded on a stock market and can be bought and sold by anyone. This can bring a lot extra finance into the business, especially if the shares are in high demand, as this will increase their value.

Question 17

What are the advantages of PLC? (3)

Answer 17

• Much more capital can be raised by PLC by any other kind of business
• Helps the firm to expand and diversify
• PLCs are incorporated and have limited liability so if things go wrong, the owners will only lose invested money

Question 18

What are the disadvantage’s of a PLC? (4)

Answer 18

> Hard to get shareholders to agree on how a business is run - each shareholders have very little say
Someone could buy enough shares to takeover the firm
Accounts have to be public - competitors can see if a firm is struggling
PLCs could have 100s or 1000s of shareholders so the profits per shareholder is lower.

Question 19

When will a business change its aim to grow or survive?

Answer 19

A new start-up business will be focused on survival. However, once it is stable, it will be focused on growth. But if the economy takes a downturn, then it will be focused on survival

Question 20

When will a business change the size of its workforce?

Answer 20

If a business is expanding, it might aim to recruit more staff. If a firm has done a takeover, then it is likely to reduce its workforce to prevent multiple workers doing the same role.

Question 21

When do businesses enter or exit markets?

Answer 21

Firms may enter new markets to sell at a new location, sell a different product, etc. This could be because the firm is growing but also the existing market may be shrinking so they need to find a new place to sell their items. If a product isn’t selling well, the firm is likely to exit the market.

Question 22

When do firms change the size of their product range?

Answer 22

If a firm has product that is selling well then they may decide to bring out more products in the same product range with different features. If it has products in a range that don’t sell well then they may aim to decrease the product range and focus promoting its best-selling products.

Question 23

What factors affect change in aims and objectives?

Answer 23

• Dynamic (ever-changing) business environment

- Factors in the business

Question 24

What dynamic business environment factors affect a firm’s aims? (8)

Answer 24

> New legislation - may need to adjust aims when new laws are released such as wages
Changes in market conditions - if a market grows, then a firm will opt to maximise sales. If a market shrinks, then a firm will opt to survive. If a market becomes competitive, then a firm may decide to to maintain its market share and maximise sales rather than maximising profit.
Changes in tech - need to be up to date with tech. May need to spend more money on new equipment and training staff rather than investing in growth

Question 25

What factors in the business affects a firm’s aims? (4)

Answer 25

> Performance - if a firm performs better or worse than expected, then aims and objectives may be changed
Internal changes - changes within the business can change aims. For e.g., if new managers are hired, then their priorities will be different to the previous therefore aims and objectives will change.

Question 26

How does globalisation impact importing?

Answer 26

Firms have a larger market to buy from, so they may be able to buy supplies more cheaply, which reduces costs and can increase profits. However, more imports means there’s more competition in a country. Firms may be forced to reduce their prices to stay competitive.

Question 27

How does globalisation affect exports?

Answer 27

Firms are able to export goods easily means firms have a larger market to sell to. This can lead to increased sales and higher profits.

Question 28

How does globalisation affect business location?

Answer 28

Globalisation has made it easier for businesses to locate parts of their business abroad. This may allow them to reduce their costs so they can make more profit, e.g. if they start producing goods closer to where they get their raw materials from, their transport costs will fall. Some firms may also set up in countries where labour is cheaper, which helps to keep their costs down.

Question 29

How does globalisation affect multinationals?

Answer 29

Single businesses operating in more than one country are known as multinationals. When a big, multinational business enters a new country, firms already in that country may need to change the way they operate in order to compete successfully.

Question 30

How are tariffs barriers to international trade?

Answer 30

These are taxes on goods that are being imported or exported. They make products imported into the country more expensive than those that are produced domestically. This helps domestic firms to stay competitive.

Question 31

How are trade blocs barriers to international trade?

Answer 31

These are groups of countries that have few or no trade barriers between them. Firms from countries outside the trade bloc will find it hard to compete with those inside, as their prices will be affected by having to pay tariff.

Question 32

How can firms use the internet or e-commerce to compete internationally?

Answer 32

They can use it to sell online. This means they can compete overseas without having to set up stores and infrastructure in foreign countries, which keeps their costs down.

Question 33

How can firms change their marketing mix in order to compete internationally?

Answer 33

E.g. they may change their prices to make sure they’re competitive, or target products and promotion at the country’s culture.

Question 34

What are the drawbacks of acting ethically?

Answer 34

Ethical policies can be costly. For example, by treating workers fairly and making sure they are all paid a fair wage, a business is likely to have higher labour costs than if they didn’t work ethically. Also, if a firm is committed to using ethically sourced materials (e.g. fair trade products) they may find it more difficult to find suppliers and have to pay a higher price for their materials These increased costs mean that a firm doesn’t make as much profit on each item that it sells. It could put its prices up so that it makes more profit per item, but higher prices might lead to lower sales (so the business still ends up with less profit).

Question 35

What are the benefits of acting ethically?

Answer 35

Firms might change their marketing to emphasise the fact that they have strong ethical policies. For example, the Co-op advertises all its chocolate as from Fair Trade sources. But advertising its ethical policies, a business might gain customers and increase its profits- there are plenty of people who think that ethical practices are more important than price. Acting ethically can have a positive effect on other stakeholders as well. For example, some shereholders will be more likely to invest in a firm if it has shown that it behaves ethically. Treating staff ethically can mean workers are more motivated, which should make the firm more productive.

Question 36

How can businesses be more sustainable? (4)

Answer 36

> Use less packaging and recycle more so that less waste goes to landfills.
Dispose of hazardous waste carefully so that it doesn’t pollute land or water.
Use more efficient machinery that is less polluting to the air and causes less noise pollution
Use more renewable energy sources and electrical goods that are more energy efficient.

Question 37

What are the benefits of being environmentally friendly?

Answer 37

Can give firms a competitive advantage - a ‘green image’ can attract new customers and increase sales.

Question 38

What are the drawbacks of being environmentall friendly?

Answer 38

Buying new machinery and developing new processes in order to be more sustainable can be very expensive. Firms have to weigh up the benefits against the negative effects it could have on their profits.

Question 39

How can pressure groups force firms to change their policies?

Answer 39

Customers may start to view the firm in a bad light. This means that the firms involved could lose customers if people stop buying from them.

Question 40

How can firms improve their image if pressure groups highlight environmental issues associated with the business?

Answer 40

> Change their marketing mix. Has to change its products. May use ethically sourced materials.
Run a promotional campaign to repair the negative publicity cause by pressure groups.