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Business > 6. Organic growth > Flashcards

6. Organic growth Flashcards

1
Q

What are the methods of growing organically

A
  1. New customer
  2. new products
  3. new markets
  4. new business model
  5. franchising
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2
Q

organic growth: new customers + example

A
  • Perhaps the easiest approach is to rely on driving sales from existing activities.
  • For example, a food processing company that supplies to local shops may gradually increase production to supply to more and more customers. The business can carry on growing organically (by building an extension or moving to larger premises if the factory reaches full capacity).
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3
Q

how can a business find new customers for organic growth + eval

A
  • It may be possible to find new customers by exploiting new distribution channels.
  • This approach to growth may need investment in marketing to increase the customer base.
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4
Q

organic growth: new products

A
  1. Some businesses grow by developing new products, They may be very innovative (i.e. good at introducing new ideas) and committed to research and development. For example, a business that designs software for computer games can grow by designing new games.
  2. a business might identify customers with slightly different needs. This could require adapting or modifying existing products (i.e. making changes to improve them) to meet these needs, A business might need to invest some of its profit into product development
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5
Q

organic growth: ways to use new markets to grow + one eval w example

A
  1. Some businesses grow organically by finding new markets for their products.
  2. For example, a hairdresser could open another salon in a different location. The assets, systems and working practices used in the original salon can be copied in another location.
  3. New premises (i.e. the building or land that a business uses) can be adapted and decorated in the style that has already been successful.
  4. Some businesses may look to overseas markets to grow.
  5. However, this approach carries more risk because markets abroad are unfamiliar. Growing by selling in new areas is sometimes called geographic expansion.
  6. For example, a number of European and US retailers have opened stores in China, such as Auchan’’’ and Carrefour from France, and GAP’’” and Bebe® from the USA.
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6
Q

organic growth: new business model

A
  1. It is possible to grow organically by using a new business model, Developments in technology or social change may lead to this growth.
  2. For example, a retailer selling children’s toys may start an online operation. This approach could see the business grow very quickly because the size of the potential market opened up could be considerable, even global,
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7
Q

organic growth: franchising + example

A
  1. A business might set up a franchising operation to increase the speed of organic growth. This approach allows other entrepreneurs to trade under the name of the original business.
  2. The fast-food outlet SUBWAY’ is an example of a business that has used this method to grow
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8
Q

advantages of organic growth

A
  1. Less risky
  2. Relatively cheaper
  3. Keep control
  4. better protection
  5. avoid diseconmies of scale
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9
Q

advantages of organic growth: less risky

A
  1. Organic growth might be less risky than other growth strategies. Growth can be achieved by extending practices that are well known and understood. This can prevent errors because the culture, norms and practices of the business are already established and effective.
  2. Organic growth can also help to avoid the complications that might arise when integrating with another organisation,
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10
Q

advantages of organic growth: relatively cheaper

A
  1. Growing organically might be cheaper than using other methods. Organic growth can be financed from retained profit, This is likely to be the cheapest of all sources of finance.
  2. There will be an opportunity cost, but the financial cost can be zero. Businesses that grow inorganically often have to borrow money or raise fresh capital, This will add to the costs of growth.
  3. Organic growth also avoids the premium prices that can be paid when buying other businesses.
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11
Q

advantages of organic growth : keep control

A
  1. A business will keep more control when growing organically. Owners, or the senior management team, will have complete control of the growth process. This is because there are no outsiders with any controlling interest.
  2. For example, a retail chain is growing because they are opening a new store in a new location every six months. Therefore, the business will have a team of employees who are experienced at opening new stores. They can go in, recruit and train new staff. They can ensure that the store is run in the way that has proved
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12
Q

advantages of organic growth: better protection + real world example

A
  • The financial position of a business might be better protected with organic growth. Since growth is gradual, there is less strain on financial resources. As a result, cash flow is stronger and the business will keep more liquidity.
  • Inorganic growth often requires huge outlays of money. For example, in 2018, US company Keurig Green Mountain Inc, bought Dr Pepper’) Snapple Group Inc. for US$18.7 billion in cash. Such high expenditure can put financial pressure on the business.
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13
Q

advanatges off organic growth: avoid diseconomies of scale

A
  1. A business that grows organically is less likely to experience diseconomies of scale. Sharp increases in unit costs are not likely to occur if growth is steady and measured.
  2. It may be easier for a business growing organically to see any possible difficulties resulting from scale increases, This will help to keep costs under control
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14
Q

what are the disadvantages of organic growth

A
  1. slow pace of growth
  2. lack of access to resources
  3. unable to be competitive
  4. unable to fully exploit economies of scale
  5. may be inappropriate
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15
Q

disadvantages of organic growth: slow pace of growth

A
  1. The pace of organic growth may be too slow for some stakeholders.
  2. For example, shareholders in a plc may want the business to provide quicker returns on their investments than organic growth can deliver.
  3. Shareholders may sell their shares if they are unhappy with the pace of growth, As a result, the share price can fall, This could make the company at risk of a takeover
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16
Q

disadvantages of organic : growth lack of access to resources + one eval

A
  1. Organic growth may prevent the business from using the resources owned by other businesses. As a result, it might miss out on some profitable developments.
  2. For example, a construction firm might want to develop expertise in energy-saving technology. This would help it to build more houses with solar panels, It could do this by gradually developing its own expertise.
  3. However, it might be better to buy a company that already does this, rather than trying to do it for themselves. Such companies will be specialists and can provide the knowledge and experience required by the housebuilder.
17
Q

disadvantages to organic growth: unable to be competitive

A
  1. A business that grows slowly may be left behind in the market. The business may end up feeling small if competitors are growing through mergers and acquisitions, As a result, it may lose its ability to compete effectively.
  2. For example, it may not be able to match the advertising budgets of its larger rivals,
18
Q

disadvantages of organic growth: unable to fully exploit EOS

A
  1. A business may be able to exploit economies of scale as it grows. However, if a business is growing organically it may take some time before such economies are fully exploited. This could mean that a business is having to operate with higher costs for longer periods of time. This could lower profit margins and make it less competitive.
  2. Also, some businesses, such as shipbuilding, require investment in large-scale production before trading can begin. Businesses that grow organically may be prevented from entering such industries
19
Q

disdavnateges of organic growth: may be inappropriate + real world example

A
  1. Organic growth may not be appropriate if a market is growing rapidly.
  2. For example, when mobile telephones were first introduced, the market expanded very quickly. Businesses making the best progress were those that were growing through mergers or acquisitions. The three firms now remaining in the UK market are all the result of multiple takeovers and mergers.
20
Q

define franchising

A

a business model where a business owner (the franchisor) allows another person (the franchisee) to trade under their name

21
Q

define retained profit

A

profit after tax that is ‘ploughed back’ into the business

22
Q

define stake

A

a financial interest in a business which entitles the investor to part-ownership

Business (22 decks)

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