2.1.1 Business Growth Flashcards
Internal/Organic growth:
- 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
Why is business growth often an important objective?
- helps to increase market share
- leads to lower unit costs
- results in more profits
Internal/organic methods of business growth and their impact:
- 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
Innovating:
developing an existing idea or improving an existing product or service
External methods of business growth and their impact:
- external (inorganic) growth
- merger
- takeover - hostile, people buy so many shares that the business is taken over
Merger/Acquisition:
- 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
Takeover:
- where one business buys another
- to take over another company it is necessary to gain control by buying enough shares
Types of merger:
- Backward vertical merger
- Horizontal merger
- Forward vertical merger
- Conglomerate merger
Backward vertical merger:
business joins one with a previous stage e.g. supplier
Horizontal merger:
businesses at the same stage join
Forward vertical merger:
business joins with one at a larger stage e.g. customer
Conglomerate merger:
businesses with no common business interest join
Types of business ownership for growing businesses:
public limited company (plc)
Internal sources of finance for growing and established businesses:
- retained profit
- selling assets
External sources of finance for growing and established businesses:
- loan capital
- share capital
- stock market flotation (public limited companies)
How can businesses grow organically?
- 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
Advantages of mergers/acquisitions:
- 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
Disadvantages of mergers/acquisitions:
- 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
Why might businesses wish to expand?
- 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
Diversification:
businesses selling or acquiring businesses that are not in the same market as the markets they are presently selling in
Why might businesses wish to diversify?
- 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
How is the size of a business measured?
- sales turnover/revenue
- number of employees
- share capital
- market share
- number of outlets e.g. shops
Share capital:
the number of shares times the price of each share
Market share:
the sales of the business of a particular product as a proportion of all sales of that type of product
Constraints on business growth:
- financial limitations
- size of the market
- government controls
- human resources
How are financial limitations constraints on business growth?
- 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
How is the size of the market a constraint on business growth?
limit to number of people willing to buy type of product business is producing
How are government controls constraints on business growth?
- 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
How are human resources a constraint on business growth?
- 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
How are loans an external source of finance for growing and established businesses?
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
How is share capital an external source of finance for growing and established businesses?
- 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
How are sales of assets an internal source of finance for growing and established businesses?
- 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
How is retained profit an internal source of finance for growing and established businesses?
- 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
Economy of scale:
average costs fall as output rises
Types of economies of scale:
- 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
Financial/Purchasing economy of scale:
- 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
Technical economy of scale:
- 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
Specialisation of the workforce / Specialist economy of scale:
- 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
Managerial economy of scale:
- 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
Communication economy of scale:
internal networks → better systems to contact colleagues
Advantages of internal/organic growth:
- 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
Disadvantages of internal/organic growth:
- 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
How can a private limited company (Ltd) change into a public limited company (PLC)?
- through stock market flotation
- when a business issues shares for sale on stock exchange
Benefits of being a public limited company (PLC):
- 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
Drawbacks of being a public limited company (PLC):
- 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
Stock market flotation:
- 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
Benefits of being a private limited company (Ltd):
- 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
Drawbacks of being a private limited company (Ltd):
- 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
Research and development:
when businesses gather knowledge to create new products or discover new ways to improve their existing products and services
Stock market flotation:
money raised when a business becomes a PLC (public limited company) by offering shares to the public to buy
