Growing the business

• Define internal (organic) growth

  Expansion from within a business using the business’ own capabilities and resources
• Approaches to internal (organic) growth:

  -Designing and developing new product ranges

  -Changing marketing mix

  -Opening new business locations

  -Investing into research and development
• Advantages to internal (organic) growth:

  -Less risky than taking over other businesses

  -Allows business to grow at a more steady rate
• Disadvantages of internal (organic) growth:

  -Retained profits may be used to finance internal growth, increasing risk as less left for emergencies

  -Slow growth (shareholders may prefer a more rapid growth)
• What are two types of external (organic growth)

  -Takeovers - when one business buys over half the shares in that company (the takeover may be agreed or not which is known as a hostile takeover)

  -Merger - where two businesses agree to join together to make a business
• Advantages of external (inorganic) growth:

  -Reduced competition and increased market share

  -The two businesses agree may allow a transfer of knowledge, skills and/or technology
• Disadvantages of external (inorganic) growth:

  -If a business grows too large or too quickly it may become inefficient in terms of management and worker motivation

  -May need to make some workers redundant, especially at management level which can reduce motivation
• A Public Limited Company means a business can sell shares on the stock exchange to raise additional finance
• Advantages of public limited company:

  -Limited liability (protects shareholders wealth)

  -Can raise large sums of finance via stock exchange

  -Stable form of structure (business continues to exist even when shareholders change)

  -Firm is more prestigious and can receive more publicity
• Disadvantages of a private limited company:

  -Shareholders may not agree with how profits have been distributed

  -Greater administrative costs

  -Finance can be limited by stock market valuation of the company

  -Public can see company information and accounts
• Internal sources of finance comes from inside the business and for growing and established businesses this is retained profit and selling assets
• Retained profit is profit from previous years being reinvested back into the business
• Advantages of retained profit:

  -No interest repayments

  -They are flexible as the business owners have complete control over how the profits are reinvested
• Disadvantages of retained profits:

  -A business may not have profits from previous years as they may have either made losses or be a start-up business

  -Growth can be slow because the level of retained profit is small
• Selling assets means selling items of values such as equipment, machinery, vehicles and premises
• Advantage of selling asset :

  -No repayment
• Disadvantages of selling assets:

  -Money is only raised on a one-off basis
• External sources of finance is finance that comes from outside the business such as loans, share capital, stock market flotation (public limited companies)
• Bank loans are usually given by a bank and refers to a set amount of money being borrowed for a set period of time with an agreed repayment schedule
• Advantages of bank loans:

  -Repayments are made in instalments so it’s easier for a business to budget

  -Interest rates may be fixed so a business can budget
• Disadvantages of bank loans:

  -Interest repayments

  -It can be time-consuming to apply for bank loans because a business will need to produce a detailed business plan to show they can afford repayments
• Bank overdraft means a business can spend more money than it has available in its bank account, resulting in their bank account balance going into a negative figure
• Advantages of a bank overdraft:

  -It is flexible as the business owner has control over how the overdraft is spent

  -Can cover cash short-falls
• Disadvantages of bank overdraft:

  -High interest repayments

  -The overdraft is repayable at any time
• Share capital is when a business sells a share (portion) of the business in return for finance from shareholders
• Advantages of share capital:

  -Large sums of money can be raised

  -No interest repayments
• Disadvantages of share capital:

  -Diluted ownership through selling a share of the business

  -Needs to satisfy shareholders by awarding dividends
• As a business grows its aims and objectives change in response to

  • Market conditions
  • Changes in technology
  • Changes in legislation
  • Internal factors (financial position of the business; management capability; developing new products or entering new markets)
• SURVIVAL AND GROWTH: In the early years of a business it will primarily focus on survival. However as it becomes more established it will begin to grow and its objectives will change
• ENTERING OR EXITING MARKETS: Entering new markets is a common strategy for growing businesses. However a business may need to exit a market because of poor performance
• GROWING OR REDUCING WORKFORCE: When a business is growing it is likely to expand its work force. But if it is underperforming then it is likely to reduce its workforce
• INCREASING OR DECREASING PRODUCT RANGE: A business often starts off with only a small number of products but over time, as business grows, it is likely to expand its range
• Globalisation means that the world is becoming interconnected by trade and exchange
• Multinational firms are businesses that produce goods in more than one country
• Advantages of globalisation:

  -Increased markets for businesses small and large through exporting

  -Due to increased competition, firms become more efficient

  -Increasing transfer of knowledge and skills throughout the world resulting in increased use of technology
• Disadvantages of globalisation:

  • Domestic firms face competition from businesses throughout the world through imports
  • Multinational firms become very powerful with their global brands
  • Makes a business vulnerable to world economic conditions
• Imports are goods that enter a country
• Exports are goods that exit a country
• Barriers to trade is when a government imposes regulations to restrict the flow of international products into its country such as tariffs
• Tariffs are a tax on imports and will allow the business which produce similar products within the domestic country to grow and survive against foreign competition