2.1.1- business growth Flashcards
what are the two methods of business growth?
- internal growth (organic)
- external growth (inorganic)
what is internal growth?
when a business grows by expanding its own activities
what is the advantage of internal growth?
- it’s relatively inexpensive
- 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 firms grows slowly so it’s easier to make sure quality doesn’t suffer and new staff are trained well
who would internal growth be right for?
a business that wants to grow quickly because its slow
what are the two methods of organic growth?
- targeting new markets
- developing new products
what is targeting new markets?
when a business aims to sell its products to people who it hasn’t tried to sell to before
how can firms target new markets?
- through new technology
- could use e commerce so people can buy products even if they don’t live near a store
- technology means items are cheaper to produce so a firm might be able to lower its prices and target a lower income market
- set up branches in other countries so they can sell directly in markets abroad
-could change the marketing mix of the product so that it appeals to a new market
how can a firm develop new products?
- innovation- when someone comes up with a new product or a new way of doing things
- innovation comes about as a result of research and development
- selling a brand new product will increase sales, allowing business to grow
what are the 2 methods of external growth?
- merger
- takeover
what is a merger?
when two firms join together to form a new but larger firm
what is a takeover?
when an existing firm expands by buying more than half the shares in another firm
what are the 4 ways a firm can merge with or take over other firms?
- join with a supplier- allows a firm to control the supply, cost and quality of its raw materials
- join with a competitor- gives the firm a bigger market share, so it will be a stronger competitor
- join with a customer- gives firm greater access to customers and more control over the price at which products are sold
- join with an unrelated firm - firm expands by diversifying into new markets - reduces risk of relying on just a few products
why is external growth risky?
less than half of mergers and takeovers are successful as it’s very hard to make two different business 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 are the disadvantages of mergers and takeovers?
- they can create bad feeling especially if the firm didn’t agree to being taken over
- they often lead to cost cutting which may mean making lots of people redundant so it can lead to tension and uncertainty among workers
what are the advantages of PLC?
- much more capital can be raised than by any other type of business
- that helps the company expand and diversify
- they are incorporated and have limited liability - can only lose the amount of money they’ve invested if things go wrong
what are the disadvantages of PLC?
- hard to get lots of shareholders to agree on how the business is run- each shareholder has very little say
- someone could buy enough shares to take over the company
- accounts have to be made public so everyone can see if a business is struggling
- lots of people wanting a share of the profits as there could be thousands of shareholders
what are internal sources of finance for growing/ established businesses?
retained profit
selling assets
what is retained profit?
profits the owner have decided to plough back into the business after they’ve paid themselves a dividend
but larger companies are under pressure from shareholders to five larger dividends- reducing the profit they can retain
what are fixed assets?
firms can raise cash by selling fixed assets, eg machinery, that are no longer in use
however there is a limit to how many assets you can sell
what are the external sources of finance for growing and established businesses?
loan capital
share capital
what is loan capital?
taking out loans then paying the money back over a fixed period of time with interest
what do banks need for a loan?
security usually in the form of assets such as property so that 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
why might established firms find it easier to get loans than new firms?
they can prove to the bank that they’ve been profitable over a long period of time so the banks see them as less risky
what is share capital? what are the advantages and disadvantages?
money raised by selling shares in the business
+ finance from share capital doesn’t need to be repaid
- the original owners will get a smaller share of the business’s profits and lose some control over how the business is run
