3.2 Business Growth

• External Growth - a business expanding its operations through mergers and/or takeovers rather than through own resources
• Organic Growth - When a firm grows using its existing resources. Tends to be slower but less risky.
• Mergers - when two similar sized businesses join together. They may retain both names
• Takeovers - Normally when a larger businesses buys out a smaller business. Smaller business changes into larger business rather than keeping own identify
• Horizontal Integration - when 2 firms at the same stage of production in the same market join together
• Backwards Vertical Integration - When a firm joins with another firm which is at an earlier stage of production. e.g a manufacturer merging with a supplier
• Forwards Vertical Integration - when a firm joins with another firm which is at a later stage of production. e.g manufacturer merging with a retailer
• Overtrading - when a firm grows quicker than its financial resources can cope with. Can cause danger of cash flow problems and insolvency
• Sales forcasting - process of using quantitative data to predict future sale levels
• Reasons why business stay Small

  • Faster profits
  • Less risky
  • Personal connection to customers/customer service
  • Fewer overheads
  • Better decision making for management
  • Maximized Profits
  • Allows differentiation
• Managing Overtrading

  • Reducing inventory levels
  • Leasing rather than buying equipment
  • Getting better payment terms from suppliers
  • Cash flow forecasting
• Payback Period - the time it takes for a business to repay its investment on a project
• Advantages of Payback Period

  • Simple and easy to calc
  • Focuses on cash flows
  • Emphasises speed of return
  • Straightforward to compare
• Disadvantages of Payback Period

  • May encourage short term thinking
  • Ignores qualitative aspects of a decision
  • Doesn't take account into time value of money
• Average Rate of Return - Looks at the total return of a project to see if it meets the target returh
• Reasons for Takeovers

  • Increase market share
  • Acquire new skills
  • Access economies of scale
  • Better distribution
  • Eliminate competition
  • Enter new segments of existing markets
• Drawbacks of Takeovers

  • High initial cost
  • May upset customers and suppliers
  • Duplicate roles (upset employees)
  • Different business cultures
  • Questionable motives
• Problems of rapid growth

  • Coping with change
  • Loss of control
  • Shortage of resources
• Benefits of Organic Growth

  • Less risky than inorganic growth
  • Allows business to grow at a more sensible rate
  • Business keeps ownership and control of brand
  • Builds on business' strengths
  • Cheaper than inorganic growth
• Disadvantages of Organic Growth

  • Slow growth
  • Franchises if used may be hard to manage
  • Growth becomes dependent on the overall market growth
• Objectives of Growth:

  • Economies of scale
  • increased market power
  • Increased market share
  • Increased brand awareness
• Problems from Growth:

  • Diseconomies of scale
  • Internal communication
  • Overtrading
  • Weaker customer relationships
  • Increase in competition
  • Dilution of control
• Example of growing organically:

  • Innovation
  • E-commerce
  • Marketing (Promotion)
• Examples of growing inorganically:

  • Mergers and Takeovers
  • Joint Ventures
  • Licensing and Franchising
• How to choose inorganic vs organic:

  • business' financial situation
  • strategic goals
  • opportunities available within market