2.1 - Growing the Business Flashcards
What are there loads of?
+There are loads of big businesses out there - but all of them have had to grow at some point.
+You need to need to know about internal and external growth.
What kind of growth is low risk?
+Internal growth is low risk but can be slow.
What is internal growth?
+Internal growth [or organic growth] is when a businesses grows by expanding its own activities.
What are the advantages of internal growth?
+Internal growth is good as it’s relatively inexpensive.
+Also, it generally means the firm expands by doing more of what it’s already good at - making its existing products; so it’s less likely to go wrong.
+The firm grows slowly, so it’s easier to make sure quality doesn’t suffer and new staff are trained well.
What is the downside of internal growth?
+But because internal growth is slow, it won’t be right for a business to grow quickly.
What are the two methods of organic growth?
- Targeting new markets
- Developing new products
What is the method of organic growth “Targeting new markets” all about?
- This is when a business aims to sell its products to people who it hasn’t tried to sell to before.
- Firms can use new technology to target new markets - eg. they could use e-commerce so people can buy products even if they don’t live near a store.
- Technology may also mean items are cheaper to produce, so a firm might be able to lower its prices and target a lower income market.
- A firm could also set up branches in other countries so they can sell directly in markets abroad.
- They could also change the marketing mix of the product [eg. the price or the way its promoted] so that it appeals to a new market.
What is the method of organic growth “Developing new products” all about?
- Selling a brand new product will increase sales for a business, allowing it to grow.
- To sell a new product, firms need innovation - this is when someone comes up with a new product of way of doing things.
- Often, innovation comes about as a result of research and development.
What kind of growth is fast?
External growtht is faster but more risky
What is External growth?
+External growth [inorganic growth] usually involves a merger or takeover.
What is a merger?
+A merger is when two firms join together to form a new [but larger] firm.
What is a takeover?
+A takeover is when an existing firm expands by buying more than half the shares in another firm.
What are the ways a firm can merge with or takeover other firms?
+There are four basic ways a firm can merge with or take over other firms.
- Join with a supplier
- Join with a competitor
- Join with a customer
- Join with an unrelated firm
What happens when a firm joins with a supplier?
+This allows a firm to control the supply, cost and quality of its raw materials.
What happens when a firm joins with a competitor?
+This gives the firm a bigger market share, so it will be a stronger competitor.
What happens when a firm joins with a customer?
+This gives the firm greater access to customers and more control over the price at which its products are sold to the end-user.
What happens when a firm joins with an unrelated firm?
+This means the firm will expand by diversifying into new markets.
+This reduces the risks that come from that come from relying on just a few products.
How successful are takeovers and mergers?
+Less than half of all takeovers and mergers are successful.
+It’s very hard to make two different businesses work as one - Management styles often differ between firms.
+The employees of one firm may be used to one company culture and not be motivated by the style used in the other.
What can mergers and takeovers create?
+Mergers and takeovers can create bad feeling, especially if the firm didn’t agree to being taken over.
What do mergers and takeovers often lead to?
+Mergers and takeovers often lead to cost-cutting.
+For example, there’s no point a business having two head offices - the business will have lower fixed costs if it just has one.
+This cost cutting may mean making lots of people redundant, so it can lead to tension and uncertainty among workers.
What do Larger firms benefit from?
+Larger firms benefit from economies of scale
What happens to a firm when it expands?
+When a firm expands, its output [the amount of products it makes] will increase.
+It costs will also increase - Eg. variable costs will increase as the firm has to buy more raw materials and fixed costs might increase if the firm has more buildings or staff.
In larger firm, often how will costs increase in proportion to output?
+Often, however, costs will increase at a slower rate than output.
+This means that the average cost of making one product [the average unit cost] is cheaper once the firm has expanded.
+These reductions in average unit cost are called economies of scale.
What are economies of scale?
+A reduction in average unit cost that comes from producing on a large scale.
Why does Economies of scale happen?
- Larger firms need more supplies than smaller firms, so will buy supplies, so will buy supplies in bulk - this normally means they can get them at a cheaper unit price than a small firm.
- Larger firms can afford to buy and operate more advanced machinery than smaller firms which may make processes faster or cheaper to run [eg. they might not need so many staff].
- The law of increased dimensions means that, eg. a factory that’s ten times as big will be less than ten times as expensive.
What happens as the average unit cost of making each product is lower?
+As the average unit cost of making each product is lower, firms can make more profit on each item they sell.
+Also, lower average unit costs mean larger firms can afford to charge their customers less for products than smaller firms can.
+This may make customers more likely to buy their products, leading to increased sales and more profit.
+The profits can be reinvested into the business so it can expand even more.
What is the opposite of economies of scale?
Diseconomies of scale
What is the downside of growth for larger firms?
+It’s not all good news for large firms though - growth brings with it the risks of diseconomies of scale.
What are diseconomies of scale?
+These are areas where growth can lead to increases in average unit costs. Eg:
- The bigger the firm, the harder and more expensive it is to manage it properly.
- Bigger firms have more people, so it can be harder to communicate within the company - Decisions take time to reach the whole workforce, and workers at the bottom of the organisational structure feel insignificant; workers can get demotivated, which may cause productivity to go down.
- The production process may be more complex and more difficult to coordinate - Eg. different departments may end up working on very similar projects without knowing.
How can large businesses raise money?
+Large businesses can use funds from Internal sources or external sources.
What are the internal sources of finance for large businesses?
- Retained Profits
- Fixed Assets
What are retained profits?
+These are profits that the owners have decided to plough back into the business after they’ve paid themselves a dividend.
+But larger companies [eg. PLCs] are under pressure from shareholders to give large dividends, reducing the profit they can retain.
What are fixed assets?
+Firms can raise cash by selling fixed assets [assets that a business keeps long-term, eg. machinery/buildings] that are no longer in use.
+There’s a limit to how many assets you can sell, though - sell too many and you can’t go on trading.
What are the external sources of finance for a business?
- Loan Capital
- Share Capital
How can large firms get loan capital?
- Small businesses can take out loans - they then pay the money back over a fixed period of time with interest.
- Banks need security for a loan, usually in form of assets such as property - If things go wrong, these assets can be sold to pay back the loan.
- Large firms can normally take out larger loans than small firms, as they usually have more valuable assets.
- Also, established firms may find it easier to get loans than new firms because they can prove to the bank that they’ve been profitable over a longer period of time - this means banks will see them as less risky.
How can large firms get share capital?
+If a business becoms a limited company it can be financed using share capital - money raised by selling shares in the business.
+Finance from share capital doesn’t need to be repaid [unlike a loan].
+However, selling shares means that the original owner[s] will get a smaller share of the business’s profits and lose some control over how the business is run.
What can public limited companies do?
Public limited companies can sell shares on a stock market.
As a business grows. what might the owners decide to make it?
+The owners might decide to make it public limited company [a PLC].
+‘Public’ means that shares in the company are traded on the stock market, and can be bought and sold by anyone.
+This can bring a lot of extra finance into the business, especially if the shares are in high demand, as this will increase their value.
What is ‘stock market floatation’?
+Selling shares on the stock market.
What are the advantages of PLCs?
+Much more capital can be raised by a PLC than by any other kind of business.
+That helps the company to expand and diversify.
+PLCs are incorporated and have limited liability, so if things go wrong, the owners only lose the amount of money they’ve invested.
