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EdExcel GCSE Business > 2.1.1 Business Growth > Flashcards

2.1.1 Business Growth Flashcards

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1
Q

Internal/Organic growth:

A
  • the growth of a business through internal processes, relying on its own resources usually by bringing out new products or by entering new markets
  • expands its sales or their operations and is financed through its own profits
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2
Q

Why is business growth often an important objective?

A
  • helps to increase market share
  • leads to lower unit costs
  • results in more profits
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3
Q

Internal/organic methods of business growth and their impact:

A
  • new products - innovation, research and development of new products
  • new markets - through changing the marketing mix, taking advantage of technology (benefit from investment in new technology), expanding overseas
  • new technology - large organisations can benefit from investing in the latest technology or in the ability to develop new technology themselves
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4
Q

Innovating:

A

developing an existing idea or improving an existing product or service

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5
Q

External methods of business growth and their impact:

A
  • external (inorganic) growth
    • merger
    • takeover - hostile, people buy so many shares that the business is taken over
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6
Q

Merger/Acquisition:

A
  • where 2 or more businesses voluntarily agree to join up and work as one business
  • when one business joins or buys other businesses, not necessarily of the same type
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7
Q

Takeover:

A
  • where one business buys another
  • to take over another company it is necessary to gain control by buying enough shares
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8
Q

Types of merger:

A
  • Backward vertical merger
  • Horizontal merger
  • Forward vertical merger
  • Conglomerate merger
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9
Q

Backward vertical merger:

A

business joins one with a previous stage e.g. supplier

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10
Q

Horizontal merger:

A

businesses at the same stage join

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11
Q

Forward vertical merger:

A

business joins with one at a larger stage e.g. customer

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12
Q

Conglomerate merger:

A

businesses with no common business interest join

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13
Q

Types of business ownership for growing businesses:

A

public limited company (plc)

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14
Q

Internal sources of finance for growing and established businesses:

A
  • retained profit
  • selling assets
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15
Q

External sources of finance for growing and established businesses:

A
  • loan capital
  • share capital
  • stock market flotation (public limited companies)
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16
Q

How can businesses grow organically?

A
  • lower price - people will buy more at lower prices
  • increase advertising - customers are made aware of the attraction of the products
  • sell in different location - selling to a new set of customers, more potential
  • sell on credit - customers are attracted by the ability to buy now and pay later
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17
Q

Advantages of mergers/acquisitions:

A
  • economies of scale - reduce unit costs
  • greater market share for horizontal integration which means the business can often charge higher prices
  • spreads risks if products different
  • reduces competition if rival is taken over
  • other businesses can bring new skills and specialist departments to the business
  • easier to raise money if a larger business
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18
Q

Disadvantages of mergers/acquisitions:

A
  • diseconomies of scale if business becomes too large leading to higher unit costs
  • clashes of culture between different types of businesses can occur reducing the effectiveness of the integration
  • may need to make some workers redundant, esp. at management levels may have an effect on motivation
  • may be a conflict of objectives and values between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business
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19
Q

Why might businesses wish to expand?

A
  • benefit from economies of scale - lower unit costs due to an increase in size
  • a large market share (selling more products than before) means they can charge higher prices and gain more profit
  • means of survival if they wish to compete with other growing businesses
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20
Q

Diversification:

A

businesses selling or acquiring businesses that are not in the same market as the markets they are presently selling in

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21
Q

Why might businesses wish to diversify?

A
  • helps spread the risks across a number of products
    • if one product fails due to market conditions then other products in different markets should not be affected
  • good way of expanding if present market seems already full
  • gives the business fresh objectives and may act to motivate managers and staff
22
Q

How is the size of a business measured?

A
  • sales turnover/revenue
  • number of employees
  • share capital
  • market share
  • number of outlets e.g. shops
23
Q

Share capital:

A

the number of shares times the price of each share

24
Q

Market share:

A

the sales of the business of a particular product as a proportion of all sales of that type of product

25
Q

Constraints on business growth:

A
  • financial limitations
  • size of the market
  • government controls
  • human resources
26
Q

How are financial limitations constraints on business growth?

A
  • business may not be able to raise necessary finance to expand
  • e.g. not made enough profits to generate the cash or the bank is not keen to lend any more money at the moment
27
Q

How is the size of the market a constraint on business growth?

A

limit to number of people willing to buy type of product business is producing

28
Q

How are government controls constraints on business growth?

A
  • business cannot necessarily have a dominant market share
  • occasionally arises when one market-leading business joins another
  • if the competition authorities think it is not in the public interest to have such a large combined business, then the joining together may not take place
29
Q

How are human resources a constraint on business growth?

A
  • limited in terms of skills available esp. in more specialised areas
  • may be difficult to find enough qualified staff in the area to expand staff
30
Q

How are loans an external source of finance for growing and established businesses?

A

long-term bank loan can be secured against the business’s assets but interest will be charged and the business will have to make fixed repayments to repay the debt

31
Q

How is share capital an external source of finance for growing and established businesses?

A
  • a PLC can raise considerable capital by selling shares
  • however, selling shares puts PLC’s at risk of being taken over and all shareholders are also entitled to a share of the profits through dividends
32
Q

How are sales of assets an internal source of finance for growing and established businesses?

A
  • large business may have assets that it no longer needs e.g. fixed assets
  • selling assets is a quick way of raising capital, but the business loses the benefit of owning the assets that it sells
33
Q

How is retained profit an internal source of finance for growing and established businesses?

A
  • safest form of finance as it involves no risk or debt
  • profit is not guaranteed and a business may require a more substantial investment than it can make as profit
34
Q

Economy of scale:

A

average costs fall as output rises

35
Q

Types of economies of scale:

A
  • Financial/Purchasing economy of scale
  • Technical economy of scale
  • Specialisation of the workforce / Specialist economy of scale
  • Managerial economy of scale
  • Communication economy of scale
36
Q

Financial/Purchasing economy of scale:

A
  • larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing
  • also likely to pay a lower rate of interest on new company bonds issued through the capital markets
  • lower cost per unit - in bulk, cheaper
37
Q

Technical economy of scale:

A
  • better tech + equipment → increased efficiency
  • large-scale businesses can afford to invest in expensive and specialist capital machinery
  • might not be viable or cost-efficient for a small corner shop to buy this technology
38
Q

Specialisation of the workforce / Specialist economy of scale:

A
  • larger businesses split complex production processes into separate tasks to boost productivity
  • by specialising in certain tasks or processes, the workforce is able to produce more output in the same time
  • expertise staff employed → fewer mistakes made → decreases costs
39
Q

Managerial economy of scale:

A
  • better managers → improved direction → increased efficiency
  • by investing in expertise as your organisation grows - specialist managers who oversee and improve production systems can streamline processes and increase productivity, resulting in lower average unit costs and economies of scale
40
Q

Communication economy of scale:

A

internal networks → better systems to contact colleagues

41
Q

Advantages of internal/organic growth:

A
  • higher production means the business can benefit from economies of scale and lower average costs
  • can maintain and keep core values + objectives of business - no clash of values, no interference from shareholders
  • usually financed using profits so less risk - more sustainable than mergers
  • easy for the business to manage internal growth and control how much the business will grow
  • can maintain current management style, culture and ethics
  • less risk - expanding what the business is good at
42
Q

Disadvantages of internal/organic growth:

A
  • there maybe be a long period between investmentand return on investment
  • growth may be limited and is dependent on the reliability of sales forecasts
  • can take a long time to grow internally
  • can take a while for the business to adapt to big changes in the market
  • market size not affected by organic growth
  • if market not growing, business is restricted to increasing its market share or finding a new market to sell products to
  • businesses might miss out on opportunities for more ambitious growth by only growing internally
43
Q

How can a private limited company (Ltd) change into a public limited company (PLC)?

A
  • through stock market flotation
  • when a business issues shares for sale on stock exchange
44
Q

Benefits of being a public limited company (PLC):

A
  • ability to raise finance through share capital - faster growth
  • limited liability - personal assets not at risk
  • considered more prestigious and reliable
  • may be able to negotiate better prices with suppliers
  • greater public awareness of the business
  • enhanced liquidity
45
Q

Drawbacks of being a public limited company (PLC):

A
  • more complex accounting and reporting procedures
  • risk of potential takeovers due to loss of control
  • increased public and media attention
  • less privacy around financial performance - account and finances have to be transparent
  • greater influence on decision-making by external shareholders
  • loss of core values as number of shareholders increase
46
Q

Stock market flotation:

A
  • a private limited company (Ltd) can change into a public limited company (PLC) through stock market flotation
  • when a business issues shares for sale on stock exchange
  • it allows them to obtain financing for new projects and investments without having to rely on their own internal revenues
47
Q

Benefits of being a private limited company (Ltd):

A
  • the owners have limited liability
  • it gives individuals the opportunity to be their own boss
  • any new shareholders need to be invited, which protects the business from outside influence
  • shares in the business can be sold to raise money
  • shares mainly sold to friends and families - have trust in other owners of the business
  • privacy of accounts
48
Q

Drawbacks of being a private limited company (Ltd):

A
  • increased paperwork
  • limited access to finances compared to public limited companies
  • in some cases others are able to view the business’s financial information
  • time consuming to set up
  • business may require outside professional help to manage its finances
49
Q

Research and development:

A

when businesses gather knowledge to create new products or discover new ways to improve their existing products and services

50
Q

Stock market flotation:

A

money raised when a business becomes a PLC (public limited company) by offering shares to the public to buy

EdExcel GCSE Business (38 decks)

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