Business 2

2.1.1 BUSINESS GROWTH After surviving the initial years and becoming established, a business may aim to grow. Owners must decide whether to pursue internal or external growth. As businesses expand, they might even consider becoming a public limited company.

Internal growth
Internal growth, also known as organic growth, occurs when a business grows naturally by gradually increasing the number of products it sells. Firms can achieve internal growth through several methods. Firstly, they can introduce new products onto the market, which is supported by conducting research and development into new ideas, adopting new technology, or fostering innovation. Secondly, a business can grow by selling its existing products in new markets. This involves adapting the marketing mix, such as targeting a different market by adjusting price or promotion strategies, or by selling products in new overseas markets through physical presence or e-commerce.

External growth
External growth, or inorganic growth, happens when a business expands by joining with another business, either through a merger or a takeover. A merger is an agreement where two or more businesses combine their resources. A takeover, on the other hand, involves one business purchasing a majority shareholding in another.

Benefits of external growth
External growth offers several benefits. Demand for products may be increasing, making it an opportune time to expand rapidly. This type of growth can often be quicker than internal growth, and the combined businesses benefit from shared resources.

Drawbacks of external growth
However, external growth also has drawbacks. Integrating two businesses can be challenging, and the process itself can be expensive.

Impact of internal growth
One impact of internal growth is that it is typically slower than external growth. This is because significant time is required to convince more customers to purchase products, leading to a slower increase in revenues and profits. A second impact is that internal growth is generally cheaper than external growth due to the gradual nature of the business's expansion, which allows for costs to be kept low, thus enhancing competitiveness in the market and contributing to successful growth.

2.1.1 FINANCING GROWTH

Growing a business requires money, whether for purchasing another business or funding research and development for internal growth. Various funding options are available, which can be self-generated or obtained from external sources.

Internal sources of finance
Retained profit is one internal source, representing profit a business can reinvest in itself. This method is cheaper than others and allows owners to maintain control, though it limits the use of this profit for other projects, and its suitability depends on the amount of profit generated. Selling assets, such as machinery, buildings, or intellectual property, can also generate finance. This is a cheap method with no repayments, but the drawback is that once sold, the business can no longer use these assets. The appropriateness of selling assets depends on how essential they are to the business.

External sources of finance
Loan capital is funding borrowed from a bank. A benefit is that the bank does not take a controlling interest in the business. Share capital is raised by issuing or selling shares. This allows for large amounts of funds to be sourced while keeping ongoing costs minimal as no repayments are made. However, issuing too many shares can lead to owners losing control, particularly if the business undergoes flotation and becomes a Public Limited Company (plc).

Impact of financing growth using loan capital
One impact of financing growth with loan capital is that the owners retain control of the business, as the bank does not take a controlling interest. This enables the original owners to continue making all decisions, ensuring the business is run according to their values. A second impact is that loan capital can be more expensive than other sources, as the business must make repayments that include interest. This increases fixed costs and, consequently, total costs, making it harder to achieve a profit.

Public limited companies (plc)
Growing businesses may choose to change their ownership structure and become a Public Limited Company (plc). A plc is an incorporated business that can access substantial financial resources by selling shares on a stock exchange, a process achieved through flotation.

Benefits of a plc
Benefits include the ability to raise finance by selling shares, shareholders having limited liability, increased public awareness of the business, and a perception of greater reliability.

Drawbacks of a plc
Drawbacks involve the risk of potential takeovers, increased media attention, public accessibility of financial accounts, and the potential loss of control after flotation.

2.1.2 CHANGES IN BUSINESS AIMS AND OBJECTIVES

As businesses grow, their aims may need to adapt. A well-established firm with high demand might shift its primary objective from survival to growth. Many factors can influence a business's aims and objectives.

Why business objectives change
Several factors can cause business objectives to change. Market conditions, such as the level of economic activity, can create new opportunities for growth when consumers have high disposable income and demand is strong. Legislation, in the form of new regulations, may impact objectives by affecting the products and services offered. Technology changes can also necessitate a shift in aims; investing in new inventions and development might become more crucial than growth, especially if competitors are leveraging new technologies. Internal reasons, such as new owners or managers with different visions for the business, can also lead to changes in aims and objectives.

Impact of business performance on aims and objectives
If a business is performing exceptionally well, it may pursue an objective of growth. This is because its current output might not be sufficient to meet product demand; therefore, by growing, the business can increase capacity and make more sales.

How business aims and objectives change as business evolves
Businesses performing well often focus on objectives such as growth, entering new markets, growing the workforce, and increasing their product range. Conversely, businesses that are not performing well may pursue objectives focused on survival, exiting markets, reducing the size of the workforce, and decreasing the product range, which may involve downsizing.

2.1.3 BUSINESS AND GLOBALISATION

Globalisation is the expansion of trade by businesses, having an increasing impact on how businesses operate internationally across many different countries. It is more about competing internationally, and governments take action to ensure that domestic firms are protected.

The impact of globalisation on businesses
Imports are the goods and services brought into one country from another. The rise of globalisation has meant that consumers can now buy goods from foreign companies more easily. This means that UK firms will face more competition, making it harder to survive.

Exports are the goods and services produced in one country and sold to another. The rise of globalisation has opened up new markets for UK businesses to sell their products to. This has given businesses opportunities to grow and potentially increase their profits.

Globalisation has allowed businesses to more easily locate overseas. By doing so, they may be able to benefit from cheaper labour, allowing them to reduce their costs, which would make them more competitive.

A multinational is a business that operates in multiple countries. These large businesses benefit from lower costs of production and from the fact that they have physical locations near their customers in the countries they operate in. Other businesses must adapt in order to compete with a multinational.

1. Explain one benefit to UK businesses from the rise in the number of imports entering the UK.
One benefit is that UK manufacturers can import cheaper raw materials from abroad. This reduces the total cost of production, allowing the business to sell the products at a lower price or to have an increased profit margin. UK businesses may now be able to import products for resale that they may not have been able to get a hold of before. This could cause more customers to be attracted to the business, leading to increased revenues and profits.

2. Explain one drawback to a multinational of setting up a location in a foreign country.
One drawback is that a business may not fully understand the needs of the customers in the country where they are choosing to set up. As a result, the product may not be suitable if they do not adapt it, meaning that customers may not buy the product and the business could get into financial trouble. Another drawback is that health and safety regulations may be different, meaning that the business's product needs to be adapted to fit with the country's regulations. As a result, costs could increase, making the products less competitive in the new market.

2.1.3 BARRIERS TO INTERNATIONAL TRADE

A trade barrier is a measure taken by the government of a country to protect domestic firms from foreign competition.

Tariff
A tariff is a tax that governments place on goods imported into the country. This will mean that it is more expensive to buy an imported good than a domestic equivalent.

Trade bloc
A trade bloc is an agreement between a set of countries to have free trade between them, meaning that no barriers to trade will be enforced when buying or selling goods across borders within the bloc. Any business whose trade is from a country outside the bloc may be subject to trade barriers. It is useful to know what trade blocs are and how they operate, though you won't be asked to name specific trading blocs. One example is ASEAN (Association of Southeast Asian Nations).

How businesses compete internationally
Developments in the Internet and the use of e-commerce have allowed businesses to sell their products and services to global website users. This has enabled businesses to enter foreign markets without the need for expensive physical locations or distribution networks, allowing them to keep costs down so they can remain competitively priced.

To successfully compete on an international scale, businesses may need to adapt their marketing mix so that they meet the needs of consumers in foreign markets.

Products
Businesses may need to adapt their products to meet the needs of the customers. Cultures, tastes, and fashions may be very different from their home country. Legislation may also be different, therefore products must meet the required safety regulations.

Price
Businesses may need to reduce their prices in order to compete with increased competition and to match the expectations of the consumers. Price may also have to take into account any tariffs that are charged.

Place
Businesses may have to look at where their products are traditionally sold and may need to find locations that match this. This may include being located online.

Promotion
Promotion must be adapted to the local culture and abide by local legislation.

2.1.4 ETHICS, THE ENVIRONMENT AND BUSINESS

As society becomes more aware of ethical and environmental issues, there is growing pressure on businesses to behave responsibly. Although this brings many benefits, it involves a trade-off with profit that may have a negative impact on financial performance. Business ethics involves placing moral values above making profits.

Ethical and environmental considerations, and the profit trade-off
A business may choose to pay workers a fair wage rather than exploiting them, or pay suppliers a fair amount for their materials. It may also choose to invest in renewable energy, source resources ethically, be honest and treat customers fairly, or use locally sourced materials rather than purchasing from afar, thus reducing its product miles and carbon footprint. Furthermore, a business may choose to use biodegradable packaging rather than single-use plastics, ensure that it cleans up all its waste rather than dumping it, or choose to be more sustainable. All these examples demonstrate ethical and responsible attitudes towards the environment, but they all involve additional expenditure. This may mean that a business does not make as much profit as it could have done, had it chosen not to behave so responsibly. That is the trade-off a business must accept.

One benefit of a business acting in an ethical manner is that it may gain a reputation for being an ethically minded company. As a result, customers will think more highly of the business and may choose to shop there, which could potentially increase sales and profits.

The impact of pressure groups
A pressure group is an organisation that aims to highlight certain issues in order to get governments and businesses to change their behaviour. They achieve this by lobbying officials and staging protests to influence a firm's marketing mix:

• Product: They want ethically produced and environmentally friendly products.

• Price: They want businesses to pay fair wages and a fair amount for supplies.

• Place: They want a business not to exploit its location and to use locally sourced materials.

• Promotion: They want businesses to provide accurate information.