3.1.2 Business growth Theme

• Objectives of growth


  • Internal growth (organic) e.g. opening new branches or new product development
  • External growth e.g. mergers and takeovers
• Objectives of cost minimisation


  • Internal contraction e.g. delayering or closing down unprofitable elements of the firm
  • External contraction e.g. selling off elements of the business
• Organic growth


  Internal or organic growth occurs when a business expands in size by opening new stores, branches, functions or plants
• Organic growth


  • Can be time consuming but is a relatively low risk strategy
  • Control is easier to maintain
• External growth


  • Integration - bringing together of 2 or more firms
  • Merger - when 2 or more firms agree to be integrated to form one firm under joint ownership - an agreement
  • Takeover - when one firm gains control over another and becomes the owner. This can be achieved by buying 51% of shares - can be hostile
• Types of integration


  • Horizontal integration - two firms at the same stage within a process
  • Vertical integration - two firms at different stages within a process
  • Forward vertical integration - a firm takes over another firm ahead of it in the process
  • Backward vertical integration - a firm takes over another firm behind it in the process
  • Conglomerate integration - two unrelated firms integrate
• Constraints on business growth

  • Size of the market
  • Accessing finance
  • Owner objectives
  • Regulation
• Size of the market

  • Impacts the business' ability to grow
  • Without market growth it is likely that a business will struggle to grow
  • Depends on the competitiveness of the market
  • With a large number of firms in the market it will be very difficult to distinguish one business from the other
  • As trends change some markets start to decline whilst others grow. A business will have to undertake market research in order to keep itself informed of these changes
• Accessing finance


  • Difficulties in accessing finance are a big problem for a business looking to grow
  • Smaller firms are likely to be seen as riskier. They do not have a track record and have less assets to use as collateral against a loan
  • For the same reasons it is difficult for them to float on the stock exchange and raise money through shares
  • Larger businesses will have access to finance raised through selling shares and private funding from financial institutions
• Owner objectives


  • Some owners will be happy to profit satisfice where a certain level of profit, below the profit maximization point, is enough to keep them content
  • One reason for this might be that they wish to keep control of the organization without outside interference
  • This would mean that they would find it difficult to access funding through selling shares or other private financing
  • Alternatively, the business might want to retain core values e.g. ethical principles that help to differentiate the business but put a constraint on growth
• Regulation


  • Regulation is undertaken by government to create competitive markets
  • This impacts on a business' ability to create monopoly power
  • The government believes that this will protect the interests of consumers so that they are not exploited by firms
  • Effective regulation will lead to greater choice and lower prices, impacting on a business' ability to make supernormal profits
  • This means that the business has less scope for financing growth