Business Growth, Linkage Industries, and Effects of Growth

Business Growth: Internal & External

Internal Growth

  • Definition: Expansion from within the company itself.
  • Methods:
    • Expanding plant and equipment to full capacity (increasing building size, outlets).
    • Employing more workers.
    • Creating or expanding product lines.
    • Increasing capital.

External Growth

  • Definition: Growth through mergers, acquisitions, or other external means (see page 143 in Essential Principles of Business Text 4th edition).
  • Methods:
    • Mergers
    • Joint ventures
    • Formation of a conglomerate through the assembly of multiple businesses in the same industry.
    • Takeovers/acquisitions

Effects of Growth on a Business

  • Small businesses that are efficient, creative, and cognizant of changing market trends are poised for growth.
  • Growth impacts the business's organizational structure and operations.
  • Organizational Structure: The creation of new posts and departments due to specialization and expansion will change the organization’s structure (typically expanding from wide to narrow).
  • Labor: More workers will be employed, resulting in greater specialization or division of labor, where tasks are subdivided into smaller tasks.
  • Communication: An increase in internal communication systems (telephone, mail, etc.) is needed to accommodate expansion.
  • Resources: More factory and office space, equipment, and furniture will be required to facilitate expansion.

Linkage Industries

Definition

  • An industry connected to another because it provides supplies or serves as a market for its finished product.

Types

  • Backward Linkage:
    • An industry depends on the output from an industry at an earlier stage of production.
  • Forward Linkage:
    • One industry or firm supplies another further up the supply chain.

Benefits of Linkages

  1. Economic ties create more job opportunities.
  2. Promotes innovation and use of new technology.
  3. Encourages large-scale production for local and export demand.
  4. Promotes cooperation.
  5. Leads to increased household incomes and foreign exchange.

Examples of Linkages

Forward Linkage
  • Farmer → Processed Food → Tourism
Opportunities for Linkages Between Caribbean Industries
  • Tourism Needs: Linked to food and beverage industries.
    • Food for hotel guests:
      • Frozen packaged processed food from primary products (secondary sector).
      • Supply of fresh food from local farmers (primary sector).
      • Food products transported to hotels and guest houses (tertiary services).
    • Drinks for hotel guests:
      • Drinks produced by factories, e.g., rum and soda drinks (secondary sector).
      • Sugar used in drink production (primary sector).
      • Drinks products transported to hotels and guest houses (tertiary sector).
    • Beds and other furniture, bedlinen, carpets
      • Furniture, linen and carpet-making industries- secondary sector.
      • Timber, cotton, wool- primary sector.
    • Hotel buildings and roads to access hotels
      • Construction industry- secondary sector.
      • Gypsum, limestone and asphalt- primary sector.

Effects of Growth on a Business (Detailed)

  1. Organizational Structure:

    • Expands as the business expands, going from wide to narrow.

  2. Capital:

    • More capital needed to run the business.
    • Fixed Capital: Buildings and machinery.
    • Working Capital: More stocks and cash-in-hand, also to pay for labor.

  3. Labor:

    • More operations mean more workers are needed.

  4. Scale of Production (Economies of Scale):

    • Expanding production results in advantages that reduce the average cost of production, known as "internal economies of scale."
    • Economies of scale: Benefits derived from increasing production.
    • Internal Economies of Scale: Growth from factors controlled by the business.
    • External Economies of Scale: Growth from changes in the industry.

  5. Use of Technology:

    • Growing businesses use more technology.
    • Examples:
      • Communication internally (intranet).
      • Communication with customers and suppliers via the internet.
      • Undertaking secondary market research.
      • Preparing documentation (writing letters, orders, etc.) and keeping records of sales, purchases, and stock levels.
      • For design and production purposes.

  6. Potential for Export:

    • As businesses expand, they usually outgrow their local market, creating new markets and more revenue.