Topic 2.1

• Internal (Organic) Business Growth


  Growth that is driven by internal expansion using reinvested profits or loans
• Reasons to Grow


  • Owners/Shareholders/Managers desire to run a large business & continually seek to grow it
  • Owners/shareholders desire higher levels of market share and profitability
  • The desire for stronger market power (monopoly) over its customers and suppliers
  • Desire to reduce costs by benefitting from lower unit costs as output increases e.g suppliers offer bulk order discounts
  • Growth provides opportunities for product diversification
  • Larger firms often have easier access to finance
• Retrenchment


  Scaling down a business's operations as it evolves, can involve reducing the size of the workforce, closing less profitable outlets, exiting existing markets
• Organic growth (internal)


  Usually generated by gaining a greater market share, product diversification, opening a new store, international expansion (new markets), investing in new technology/production machinery
• Product diversification


  Opens up new revenue streams for a business, firms may spend money on research and development, or innovation to existing products to help create a new revenue stream
• Advantages of Internal (Organic) Growth

  • The pace of growth is manageable
  • Less risky as growth is financed by profits and there is existing business expertise in the industry
  • The management knows & understands every part of the business
• Disadvantages of Internal (Organic) Growth

  • The pace of growth can be slow and frustrating
  • Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to
  • Access to finance may be limited
• External (Inorganic) Business Growth

  Integration in the form of mergers or takeovers resulting in rapid business growth
• Merger


  Two or more companies combine to form a new company, the original companies cease to exist and their assets and liabilities are transferred to the newly created entity
• Takeover


  One company purchases another company, often against its will, the acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations
• Reasons for Mergers and Takeovers

  • Strategic fit
  • Lower unit costs
  • Synergies
  • Elimination of competition
  • Shareholder value
• Types of External (Inorganic) Growth

  • Vertical integration (forward or backwards)
  • Horizontal integration
• Forward vertical integration


  A merger or takeover with a firm further forward in the supply chain
• Backward vertical integration


  A merger/takeover with a firm further backwards in the supply chain
• Advantages of Vertical Integration (Inorganic Growth)

  • Reduces the cost of production as middleman profits are eliminated
  • Lower costs make the firm more competitive
  • Greater control over the supply chain
  • Reduces risk as access to raw materials is more certain
  • The quality of raw materials can be controlled
  • Forward integration adds additional profit as the profits from the next stage of production are assimilated
  • Forward integration can increase brand visibility
• Disadvantages of Vertical Integration (Inorganic Growth)

  • There may be unnecessary duplication of employee or management roles
  • There can be a culture clash between the two firms that have merged
  • Possibly little expertise in running the new firm results in inefficiencies
  • The price paid for the new firm may take a long time to recoup
• Advantages of Horizontal Integration (Inorganic Growth)

  • The rapid increase of market share
  • Reductions in the cost per unit due to receiving more beneficial terms for bulk purchases
  • Reduces competition
  • Existing knowledge of the industry means the merger is more likely to be successful
  • The firm may gain new knowledge or expertise
• Disadvantages of Horizontal Integration (Inorganic Growth)

  • Unit costs may increase for example due to unnecessary duplication of management roles
  • There can be a culture clash between the two firms that have merged
• Public Limited Company (PLC)


  A company that has sold shares to the public on a stock exchange
• Advantages of Becoming a PLC

  • Access to Capital
  • Shared Risks
  • Increased Liquidity
  • Extended Decision-making
  • Greater Public Profile
• Disadvantages of Becoming a PLC

  • Increased Regulation
  • Loss of Control
  • Costly to Set Up
  • Market Pressure
  • Risk of Hostile Takeover
• All businesses need finance in order to get started, allow them to grow and fund their continuing activity
• Sources of Finance


  • Internal sources
  • External sources
• Internal finance


  Finance that comes from inside the business, such as owner's capital, retained profit, or the sale of assets
• External finance


  Finance that comes from outside the business, such as loans, equity investment, or government grants
• Imports


  Goods and services bought by people and businesses in one country from another country
• Exports


  Goods and services sold by domestic businesses to people or businesses in other countries
• Exports generate extra sales revenue for businesses selling their goods abroad
• Imports result in money leaving the country which generates extra revenue for foreign businesses
• Globalisation


  • The economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology & finance
• The past twenty years has been characterised by rapid globalisation and growing international business expansion
• Factors to assess when considering setting up production facilities in another country

  • Costs of production
  • Skills and availability of labour force
  • Infrastructure
  • Location in a trading bloc
  • Return on investments
  • Natural Resources
  • Political Stability
  • Ease of doing business
  • Government Incentives
• Costs of production


  Businesses want to keep costs of production low as this can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage
• Skills and availability of labour force

  The quality of the workforce is important as this will directly impact the quality of the goods and services produced in an economy. Businesses may choose to locate production in a market where the labour costs are lower.
• Infrastructure


  Businesses need to consider the infrastructure needed such as roads as this will affect the production process
• Location in a trading bloc

  A business located in a market within a trade bloc will be able to access many advantages such as reduced protectionist measures
• Return on investments


  Assessing the return on investment in different markets will reduce the risk of the initial investment not being paid for
• Natural Resources


  It is often important that a business has easy access to their raw materials as this can help to reduce transportation costs and help to reduce any potential delays to the production process
• Political Stability


  Businesses may be at risk of not gaining a return on their investment in a country with political instability. An economy with a stable economy and government is seen as a less risky investment for a business
• Ease of doing business

  A business will want to locate in an area where there is limited bureaucracy, so the process of establishing production facilities is not delayed or does not incur high costs