2.1 Growing the business

Question 1

Reasons to grow

Answer 1

Owners/Shareholders/Managers desire to run a large business & continually seek to grow it.
Desire to reduce costs by benefiting from lower unit costs as output
increases.
Owners/shareholders desire higher levels of market share and profitability.
Growth provides opportunities for product diversification.
The desire for a stronger market power over its customers and suppliers.
Large firms often have easier access to finance.

Question 2

Retrenchment

Answer 2

Retrenchment involves a business scaling down its operations as it evolves and can involve:
Reducing the size of the workforce.
Closing less pro fitable outlets.
Exiting existing markets.
Retrenchment can help a business to reduce costs and is particularly relevant for businesses whose objective is to survive.

Question 3

Organic business growth

Answer 3

Organic growth is growth that is driven by internal expansion using reinvested profi ts or loans.
Organic growth (internal) is usually generated by:
Gaining a greater market share.
Product diversi cation.
Opening a new store.
International expansion (new markets).
Investing in new technology/production machinery.

Question 4

Advantages and disadvantages of organic growth

Answer 4

Advantages - The pace of growth is manageable
Less risky as growth is financed by profit s and there is existing business expertise in the industry.
The management knows & understands every part of the business.

Disadvantages - The pace of growth can be slow and frustrating.
Not necessarily able to benefit from lower unit costs as larger firms would be able to.
Access to finance may be limited.

Question 5

Inorganic business growth

Answer 5

Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others.
Integration in the form of mergers or takeovers result in rapid business growth and is referred to as external or inorganic growth.

Question 6

Merger

Answer 6

A merger occurs when two or more companies combine to form a new company.
The original companies cease to exist and their assets and liabilities are transferred to the newly created entity.

Question 7

Takeover

Answer 7

A takeover occurs when one company purchases another company, often against its will.
The acquiring company buys a controlling stake in the target company’s share (>50%) and gains control of its operations.

Question 8

Reasons for takeovers or mergers

Answer 8

Strategic fit - a company may acquire another company to expand into new markets, diversify its product offerings, or gain access to new technology.
Lower unit costs - larger companies are able to achieve lower unit costs as they receive many benefits from being large.
Synergies - synergies are the benefits that result from the combination of two or more companies, such as increased revenue, cost savings, or improved product offerings.
Elimination of competition - takeovers are often used to eliminate competition and the acquiring company increases its market share.
Shareholder value - Mergers and takeovers can also be used to create value for shareholders. By combining companies, shareholders can benefit from increased profit, dividends and higher stock prices.

Question 9

Forward and backward vertical integration

Answer 9

Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain.
Backward vertical integration involves a merger or takeover with a firm further backwards in the supply chain.

Question 10

Advantages and disadvantages of vertical integration

Answer 10

Advantages - reduces the cost of production as middleman profits are eliminated.
Lower costs make the firm more competitive.
Greater control over the supply chain reduces risk as access to raw materials is more certain.
The quality of raw materials can be controlled.
Forward integration adds additional profits as the profits from the next stage of production are assimilated.
Forward integration can increases brand visibility.

Disadvantages - there may be unnecessary duplication of employee or management roles.
There can be culture clash between the two firms that have merged.
Possibly little expertise in running the new firm may result in inefficiencies.
The price paid for the new firm may take a long time to recoup.

Question 11

Advantages and disadvantages of horizontal integration

Answer 11

Advantages - the rapid increase of market share.
Reduction in the cost per unit due to receiving more beneficial terms for bulk purchases.
Reduces competition.
Existing knowledge of the industry means the merger is more likely to be successful.
The firm may gain new knowledge or expertise.

Disadvantages - unit costs may increase for example due to unnecessary duplication of management roles.
There can be a culture clash between two firms that have merged.

Question 12

Becoming a public limited company (PLC)

Answer 12

When a business is growing rapidly it may require significant amount of capital to fund its expansion.
To secure this funding, it may choose to transition to a private limited company (LTD) to a public limited company (PLC).
This is a complex process with many legal requirements and involves undergoing stock market flotation.

Question 13

Advantages of becoming a public limited company (PLC)

Answer 13

Access to capital - significant amounts of capital can be raised very quickly.
This is often a more cost effective way to raise capital than borrowing money from banks or other lenders.
Shared risks - the risks associated with ownership are spread among a group of large shareholders.
This reduces the financial risk to any individual.
Increased liquidity - a company’s shares become liquid (they can be bought and sold more easily) on a public stock exchange.
This can increase the value of the company’s shares and make it easier for shareholders to buy and sell shares.
Extended decision making - the company will have a board of directors made up of individuals from outside the company management, and representatives from major shareholders.
This can extend the decision making process and bring in additional expertise and perspectives that can help the company grow.
Greater public profile - Becoming a PLC can raise a company’s pubic profile and increase its visibility with customers, suppliers and potential investors.
This increased visibility can help the company attract new businesses and grow its customer base.

Question 14

Disadvantages of becoming a public limited company (PLC)

Answer 14

Increased regulations - The business is required to adhere to a range of legal and financial regulations which can be costly and time consuming to comply with. They include: Completing regular financial reports, Maintaining accurate accounting records and Holding annual general meetings.
Loss of control - Selling shares to the public means that it will have many shareholders who will have a say in how the company is run.
The businesses founders may find that decisions are made by a board of directors, or a CEO whom they appoint.
Costly to set up - setting up a public limited company can be expensive, including: fees for legal and accounting advice and the costs associated with the initial public offering (IPO).
Market pressure - PLCs are expected to deliver consistent growth and profits to their shareholders.
This can pressure on the management team to prioritise short term financial performance over long term strategic planning.
Risk of hostile takeover - with publicly traded shares, a hostile takeover by a competitor is always a risk.

Question 15

Finance

Answer 15

All businesses need finance in order tor to get started, allow them to grow and fund their continuing activity.
Finance may be needed for capital expenditure which is spending on fixed assets such as equipment, buildings and vehicles.
Similarly, finance is required for revenue expenditure which is spending on raw materials or day to day expenses such as wages or utilities.

Question 16

Internal sources of finance

Answer 16

When the finance comes from inside the business it is called an internal source of fi nance.
Owner’s capital (personal savings) - Personal savings are key source of funds when a business starts up.
Owners may invest more as the business grows or if there is a specific need.
Retained profit - the profit that has been generated in previous years and not distributed to owners is reinvested back into the business.
This is a cheap source of finance, as it does not involve borrowing and associated interest payments.
The opportunity cost of investing the money back into the business is that shareholders do not receive extra profit for their investment.
Sales of assets - selling business assets which are no longer required generates a source of finance.
A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash.

Question 17

Advantages and disadvantages of internal sources of finance

Answer 17

Advantages - Internal finance is often free as it does not involve paying interest or charges.
It does not involve third parties who may want to influence business decisions.
Internal finance can usually be organised very quickly without significant paperwork.
Businesses that may fail credit checks can access internal finance sources more easily.

Disadvantages - there is a significant opportunity cost involved in the use of internal finance.
Internal finance may not be sufficient to meet the needs of the business.
Using an internal finance method is rarely as tax efficient as many external methods.

Question 18

External sources of finance

Answer 18

External finance is sourced from outside of the business.
The most common types of external finance include bank loans and share capital.

Question 19

Bank loans

Answer 19

A sum of money is borrowed from the bank and repaid with interest over a specific time period.
Pros - bank loans are usually secured and are typically repaired over two to ten years.
Interest rates are fixed for the term of the loan so repayments are made In equal instalments - which helps with business planing.
Cons - interest is payable and the business assets are at risk if the business does not make repayments as planned.

Question 20

Share capital

Answer 20

Share capital for private limited companies (LTD) is usually sourced by selling shares to family and friends or private venture capitalists.
Share capital for public limited companies (PLC) is usually sourced by listing shares on an initial public offering and selling them to investors through stock exchange.
Pros - large amounts of money can e raised from wealthy investors especially when becoming a public limited company.
Shareholders who buy a large amount of shares may also bring and share expertise which can be beneficial to the business.
Cons - shareholders are the owner of shares and they are entitled to a share of the company’s profit when dividends are declared.
Shareholders usually have a vote at a company’s annual general meeting (AGM) where they can have a say in the composition of the board of directors.

Question 21

Why business aims and objectives change

Answer 21

As a business grows in size and evolves its objectives can change.
These objectives are often influenced by various internal and external factors.
These changes are often necessary to ensure that the business remains competitive, profitable and compliant with regulations.

Question 22

Factors which can cause business objectives to evolve

Answer 22

Market condition - market conditions such as competitions, demand, and changing consumer price sensitivity can have a significant impact on a businesses aims and objectives.
Technology - a business may shift its focus from traditional brick and mortar retail to online retail as technology allows for a more cost effective way to reach customers.
Performance - if a business is not meeting its sales goals in an area, it may change its objectives to try and improve its financial performance.
In some cases this may involve retrenchment (moving out of existing markets)
Legislation - a company may need to shift its focus to comply with new regulations or capitalise on new opportunities created by changes in legislation.
Internal reasons - factors such as changes in management or the company culture can also influence a businesses aims or objectives.

Question 23

Evolution of business aims and objectives

Answer 23

Focus on survival or growth - A start-up may initially aim to survive by breaking even and becoming profitable .
As the company grows and becomes more established its objective may change to focus on growth.
This may include expanding into new markets or investing in new products or services.
Entering or exiting markets - A company may decide to enter a new market to expand its customer base or to diversify its products.
Conversely, a business may decide to exit a market if it is not profitable.
Growing or reducing the workforce - A growing company may need to hire additional employees to support its expansion.
Conversely, a company may decide at any point to reduce its workforce to cut costs or streamline operations.
Increasing or decreasing product range - A company may choose to increase its product range to expand its customer base or to stay competitive in the market.
Alternatively, a company may decide to decrease its product range if certain products are not proving to be profi table.

Question 24

Globalisation

Answer 24

Globalisation is the economic integration of di fferent countries through increasing freedoms in the cross-border movement of people, goods/services, technology & finance.
The past twenty years has been characterised by rapid globalisation and growing international business expansion.
Businesses that trade internationally import and export goods/services.

Question 25

Import and export

Answer 25

Imports are goods and services bought by people and businesses in one country from another country. Imports result in money leaving the country which generates extra revenue for foreign businesses. Exports are goods and services sold by domestic businesses to people or businesses in other countries. Exports generate extra sales revenue for businesses selling their goods abroad.

Question 26

Changing business locations

Answer 26

Globalisation has also presented opportunities for businesses to relocate to low-cost locations overseas. Businesses may choose to set up production facilities in other countries. This is a different process from choosing a country as a potential market for customers. When setting up production facilities in another country, several factors need to be assessed to ensure a successful outcome. These include the costs of production, skills and availability of labour force, infrastructure, location in trade bloc, government incentives, the ease of doing business, political stability, natural resources available, and the likely return on investment.

Question 27

Factors when assessing production location

Answer 27

Cost of production - businesses want to keep costs of production low as this can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage. Skills and availability of labour force - The quality of the workforce is important as this will directly impact the quality of the goods and services produced in an economy. Businesses may choose to locate production in a market where the labour costs are lower. Infrastructure - Businesses need to consider the infrastructure needed such as roads as this will affect the production process. Location In trading bloc - a business located in a market within a trade bloc will be able to access many advantages such as reduced protectionist measures. Return on investment - Assessing the return on investment in different markets will reduce the risk of the initial investment not being paid for. Natural resources - It is often important that a business has easy access to their raw materials as this can help to reduce transportation costs and help to reduce any potential delays to the production process. Political stability - Businesses may be at risk of not gaining a return on their investment in a country with political instability. An economy with a stable government and economy is seem as a less risky investment for a business. Ease of doing business - a business will want to locate in an area where there is limited bureaucracy, so the process of establishing production facilities is not delayed or does not incur high costs. Government incentives - Businesses may be offered incentives by the government.

Question 28

Multinational corporations (MNC)

Answer 28

A multinational corporation (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries. Factors such as globalisation and deregulation have contributed to the growth of MNC’s. MNC’s will choose locations based on factors such as cost advantages and access to markets.

Question 29

Advantages and disadvantages of MNC's

Answer 29

Advantages - The MNC can gain access to cheap labour and/or raw materials. Local residents may benefit from job opportunities and growth in the local economy. MNCs often invest to improve infrastructure. Better roads, transportation and access to water and electricity would help the local community in addition to helping the MNC operate more efficiently. MNCs may have to pay taxes and business rates to local councils/ authorities These funds may be reinvested back into the local community. MNCs can establish charitable initiatives that have a positive effect on the local community. Disadvantages - MNCs may cause damage to local habitats/environment during production process. MNC's may leave unsightly production facilities behind once they have extracted all of the resources and left the country.

Question 30

Tariffs

Answer 30

Protectionism Is when a government seeks to protect domestic industries from foreign competition. A tariff is a tax placed on imported goods from other countries. A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses.

Question 31

Advantages and disadvantages of tariffs

Answer 31

Advantages - They protect infant industries so they can eventually become more competitive globally. An increase in government tax revenue. Reduces dumping by foreign businesses as they cannot sell below the market price. Disadvantages - Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers. Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers. Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them.

Question 32

Trade blocs

Answer 32

A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other. Three of the largest trading blocs include The European Union (EU), The Association of Southeast asian nations (ASEAN) and the North American free trade agreement (NAFTA).

Question 33

Impact of trading blocs

Answer 33

Businesses outside the trading bloc will face higher costs from protectionist measures such as tariffs and trying to meet legal requirements inside the trading bloc. This will make them less competitive when trying to sell goods to member countries within the bloc. Being outside the bloc is likely to decrease their sales volume to countries within the bloc.

Question 34

Advantages of trading blocs

Answer 34

Access to more markets - Businesses are able to sell to more customers due to free movement of goods. External tariff walls - an external tariff wall is a tax applied to imported goods from outside the bloc. This protects businesses within the trading bloc from competition from businesses outside the trading bloc. Infrastructure support - Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries inside the trading bloc. Free movement of labour - Trading blocs may also have free movement of labour allowing businesses to source workers from a wider pool. A higher supply of labour may push wages lower, leading to reduced costs for business.

Question 35

Disadvantages of trading blocs

Answer 35

Increased competition - There is increased competition for businesses within the trade b loc which may be more of an issue for small businesses as they have less resources available with which to compete. Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc. Common rules and regulations - In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to. Retaliation - External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries. Inefficiency - although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside the bloc. This may reduce the incentive of businesses to be more efficient. Trading blocs also lead to trade diversification which means trade is taken away from efficient producers who operate outside of the trade bloc and replaced by trade within the bloc.

Question 36

How businesses compete internationally

Answer 36

The use of the internet and e-commerce has transformed the way businesses compete internationally. Companies can now reach global customers and sell products/services through online platforms.

Question 37

Changing the marketing mix to compete internationally

Answer 37

Businesses have to adapt the marketing mix to a new overseas market ensure the success of the product/service. Businesses need to take into account the different cultural behaviours and customs when operating in overseas markets. Businesses must ensure that their marketing messages are translated accurately and appropriately.

Question 38

Ethical and environmental impacts on businesses

Answer 38

Ethical and environmental considerations have become increasingly important to businesses as consumer concerns have the potential to quickly damage a business or brand reputation. Ethical and sustainable practices can prove costly. They are essential as many business stakeholders demand greater accountability and transparency. Some companies have been able to use their ethical and environmental practices to add value to their brands and this has increased their profitability.

Question 39

Ethical considerations

Answer 39

Ethical considerations can have a signicant impact on business activity. Companies need to balance their ethical responsibilities with the need to generate profit. Companies have faced criticism for using sweatshops and exploiting workers in developing countries. In response they have implemented a code of conduct for its suppliers and have started using sustainable materials. Implementing these ethical practices has come at a cost which has impacted the company's profitt margin.

Question 40

Environmental considerations

Answer 40

Balancing their environmental responsibilities with the need to generate profit is also a priority for many businesses. Companies have faced criticism for contributing to deforestation in order to produce palm oil. In response, company's have committed to sourcing sustainable palm oil but this has come at a higher cost than sourcing non-sustainable palm oil which has negatively impacted the company's prot margin.

Question 41

Pressure group activity on the marketing mix

Answer 41

Pressure groups are organisations that seek to influence public policy or business practices. They use a variety of tactics to achieve their goals. Greenpeace is a pressure group that campaigns for environmental issues and it has targeted companies like Nestle for using unsustainable palm oil. In response, Nestle has committed to sourcing sustainable palm oil but this has impacted the company's marketing mix. Nestle has had to change its packaging and labelling to reflect its commitment to sustainability and it has had to spend money on advertising campaigns to communicate this message to customers.