Business Growth Flashcards
What is business growth?
Is any form of expansion of the business
How to measure business size or growth?
Look at either the quantity of sales or the value of sales
What is internal (organic) growth?
Takes place inside the business and without any reference to other source.
It is slow to achieve and is a gradual process.
Methods of internal growth
Reinvest businesses profits - meaning the owner will take little or no profit out of the business but instead use it to improve the business, this will be for a limited period as owner needs to make gains.
Expand its product range - manufacturing business may extend its range of products or a retail business may introduce new lines of products.
Develop new markets - business may expand by selling its products abroad or open new branches to sell in a wider area.
Advantages of internal growth
Does not involve other businesses therefore owners keep complete control.
Spreads risk by entering new market or developing new products.
Business should be able to compete better with its main rivals.
Growth takes place gradually when the business can afford it.
Disadvantages of internal growth
Very slow method of growth.
Owners may have very little personal gain from the business if all the profit is being ploughed back into the business to achieve growth.
Owners are having to look continuously for new markets and/or new products in order to gain competitive advantage.
What is external growth?
Involves bringing together a number of organisations to form a single business.
Faster type of growth.
Main implication is the loss of control and the introduction of shared management and decision making.
Can be achieved through takeovers, mergers(forms of integration or amalgamation) and franchising.
What are takeovers?
Involves a business buying over control of another business by having to buy a large number of shares so that it can control the voting of the business.
Often are hostile and are not welcomed by the other business and the main implication of this is strained relationships at managerial level.
Other times takeovers are often agreed and the other business welcomes the opportunity to be part of a larger organisation to enjoy greater prosperity.
What are mergers? (Integration)
Agreed joining of two businesses in order to form one larger business.
All the capital as well as all resources and assets are joined together.
Methods have to be worked out whereby two workforces can work as one.
Has the added implication of shared resources without costly duplication, another would be staff redundancies.
What is horizontal integration?
Takes place between business on the same level within the same type of business e.g. two sweet shops.
Allows the company to increase its market share quickly and therefore the firm should achieve higher revenues and profits.
Adv - economies of scale, reduction in competition, specialisation.
Disadv - staff redundancies, conflict between managers and workers.
What is vertical integration?
Takes place between businesses on different levels within the same type of business e.g. chocolate factory with a chocolate shop.
Backwards vertical - when a company takes over a firm supplying its raw materials e.g. pub buying a brewery.
Forwards vertical - when a firm takes over a company further along the production chain e.g. brewery buying a pub.
Adv - secures supplies of raw materials, control over price and quality of supplies, control over how products are sold.
Disadv - increases firm’s dependence on one industry,
What is lateral integration?
Takes place when a business expands by merging with another business which is in a related but different area.
E.g. if a chocolate factory merges with an ice-cream factory.
Takes place usually because the business is expecting a decline in one of its markets and is branching out into other markets.
Adv - economies of scale associated with joint production, opportunities for joint marketing campaigns.
Disadv - lack of expertise in the different industry and it can lead to investigations from the competition authorities.
What is conglomerate integration?
When firms in different industries merge. The goods and services they product are not directly related.
E.g. merger of a cheese processing plant with an electronics manufacturer.
Adv - safeguard provided by operating in a number of different industries, profitable products can compensate for unprofitable ones.
Disadv - firm may lack the expertise to be successful in a completely separate industry and it can lead to investigations from the competition authorities.
Advantages of mergers
Savings are made because one merged organisation is able to operate with less equipment and other resources than two.
No duplication in running costs.
Business would be operating on a larger scale so would benefit from economies of scale.
Market share would increase and sales should therefore increase also.
Disadvantages of mergers
Possibility of staff redundancies as two full sets of staff may not be required.
Consumers have less choice as one business has gone.
Clash of management styles.
What is franchising?
Popular method by which companies expand their operations and open shops in various parts of the country.
Main implication is that it is seen as a branch of a large chain rather than an independent business in its own right, owner is seen as a manager rather than as an owner.
On the postitive side, the implications are that the franchised business enjoys the reputation and ready-made market which come with being part of a large enterprise.
What are the factors hindering the growth of a business?
Lack of finance - growth require capital, it it needed to get premises, machinery and other resources, it the business cannot raise required capital it would be impossible to expand.
Lack of demand - a business will not be able to grow and keep up with the market unless it either makes alterations to its product or changes to a different product.
Difficult economic climate - in times of recession or when sterling is weaker it’s difficult for a business to grow as consumers will have less money so the sales will go down and profits are reduced.
What is economies of scale?
Are gained when a business increases its production and this causes a decrease in average production costs-unit costs.
E.g. when production is increased in the newspaper industry, the costs do not multiply in proportion to the number of copies.
Also an advantage of growth.
What is technical economies of scale?
Gained in situations where the business can cut its production costs by introducing upgraded technology or by altering its production methods.
Increased mechanisation will speed up production and allow to use flow manufacturing.
What is financial economies of scale?
Gained in situations where the business can borrow money or otherwise gain finance by cheaper methods.
What is marketing economies of scale?
Gained in situations where the business can save on expenses associated with marketing such as advertising and distribution.
E.g. it costs the same to deliver ten boxes of goods in one lorry load as it does to deliver one box of goods.
What is purchasing economies of scale?
Gained when large companies are able to purchase goods in bulk.
Large companies are given a discount for buying in bulk which reduces the price per unit they pay whereas a small business cannot purchase in bulk.
What is managerial economies of scale?
A sole trader must try to be a ‘Jack-of-all-trade’ in managing all aspects of their business.
Larger businesses can afforded to appoint specialised managers with expertise in their own areas.
Advantages of growth
Increased profit - cause the business is larger it will have an increased volume of sales which result increased profit for the company.
Greater market influence - large business will be more powerful and influential in the market as it’s in a position to negotiate better prices with suppliers and buy its stock more cheaply.
