2.1.1 Business Growth

Internal (organic) growth

• new products

• new markets

• employing more staff

• growing from within

new products

• innovation

• research

• development

new markets

• through changing marketing mix

• taking advantage of technology

• expanding overseas

advantages of internal growth

• can retain their own company culture

• higher production means a business can benefit from economies of scale & lower average costs

• more influence comes with more market share, the business can start setting prices for the industry

disadvantages of internal growth

• very high risk strategy, opening lots of stores/ taking on new staff is very risky

• long period between investment & return on investment

• growth may be limited & is dependent on reliability on sales forecasts

economies of scales

• benefits gained from operating at a large scale

• e.g. the bigger you are the more likely you are to be able to negotiate deals with your supplies on the cost of raw materials = bulk buying

• this means reduced average unit costs

• more profit per unit can be made

External (inorganic) growth

• takeover

• merger

takeover

when one company buys another one (with over 50% of shares) - acquisitions

can be hostile or friendly(white knight)

merger

when two businesses merge to become a new one

advantages of external growth

• economies of scale

• increased revenue & market share → increased size increases market power and ability to set higher prices

• buying technology → simpler to buy and create

• international expansion → buying a business overseas helps business with culture issues, foreign laws etc

disadvantages of external growth

• clash of cultures → all businesses have a slightly different culture and they may not work well together

• communication problems → as businesses get bigger/too many employees

• unreliable merger partners → depends on trust between businesses

• diseconomies of scale

• 80% of mergers fail

diseconomies of scale

• when a business gets too large it can face problems that causes average unit costs to rise instead of fall

causes:

• management problems → bigger so harder & more expensive to manage

• communication issues → more people make it harder to communicate clearly & quickly, decisions take longer & some staff may feel insignificant/demotivated

• production problems → process is more complex & harder to coordinate, different departments working on same projects causing confusion & wasted resources

Explain one disadvantage to a small business from using retained profit. (3)

• they may not have enough

• small business so may not have raised enough to cover cost of expansion

• business may have to use another source of finance like a loan to cover cost

Discuss impact on a business of taking out a bank loan to finance business expansion. (6)

• one impact is debt

• when a business takes out a loan they have to pay interest

• the money they are paying back increases costs

• sales may reduce so they can't make enough revenue to cover costs

• but a loan allows a business to keep control

• business will be in full control rather than selling shares and losing control to stakeholders

Discuss a method that a business could use to grow internally. (6) - new product development

• new product

• able to aim product at specific customer

• increase target audience

• different from competitors

• → more customers, sales rev and profit

• can reinvest back into business to grow,expand

• + control over pace

• - costly

Discuss a method that a business could use to grow internally. (6) - new market

• new market

• wider range of customers and increases brand awareness → economies of scale

• business will sell more products/services increasing sales revenue and profit

• can use profit to reinvest into business → to expand/grow

• costs will increase → slow increase in profit

• growth limited according to expertise of staff and finance available

Public limited company (PLC)

• trade their shares on the stock exchange

• public shares

• raise huge sums of money to reinvest into business for expansion

• - loss of control

advantages of PLC

• can issue more shares to raise capital

• bank more willing to lend money to a large, well established business

disadvantages of PLC

• expensive → administrative (paper) work & must raise funds of £50,000

• has to prepare annual accounts - printed and sent to shareholders → made available for public to see so competitors will know plans for business (known as companies house)

stock floatation

the first time you sell your company’s shares on the stock market

share issue

when you are an established business on the stock market and you sell ‘more’ shares to raise more money

How to PLC work

• shareholders own part of company in shares

• annual general meeting they vote in directors

• directors and managers run the business own behalf of shareholders

How do shareholders make money?

• dividend payments → annual payment of your share of profit

• selling shares at more than you bought them for → capital gains