Why do firms grow?
- Economies of Scale
- Domination of the market (increased market share)
- Self Vanity (Power and status)
- Financial support (Government funds - high amount of employment)
- Diversification (Afford to produce a wider range of products, less risk)
Methods of Internal Expansion
1) The firm produces more of current products in existing markets
2) The firm puts its current products into different markets
3) The firm makes a new product similar to existing ones - line extension
4) The firm could make a completely different new product - diversification
Internal Expansion - Advantages + Disadvantages
- Making similar products that they are familiar with (less risk)
- It takes a long time to achieve growth
Methods of External Expansion
Firm joins with supplier - Allows the firm to control the cost and quality of the raw material
Firm joins with competitor - Bigger market share and more economies of scale
Firm joins with an unrelated companies - Diversify, less risk, don't need to rely on just a few products
Firm takes over a customer - Greater access to customers, easier to sell its products
External Expansion - Disadvantages
1) Less then half of all takeovers and mergers and unsuccesful. It is hard to fit two different management styles together as different companies motivate their stuff in different ways
2) Mergers and takeovers leave a bad feeling. Most takeovers are hostile and unpopular
3) Mergers and takeovers can lead to cost-cutting. This may result in making people redundant
Expansion by Franchising - Advantages
1) Rapidly increases brand awareness and market share without the usual costs and risks
2) More economies of scales , benefit from increased sales. Don't have to pay for wages and other costs.
How the growth of a business affects its stakehold
Shareholders - Benefit from increased profit. They will most likely be asked to invest more money to help expand. More shares will be created which means smaller shareholders would have less influence on the business.
Employees - They will benefit from greater job security as the business is bigger. Due to the growth, it is more likely to become hierachial and the employee may feel like less involved with the running of the business. Workers may join a trade union
Government - Recieve more taxes from bigger companies. Some companies become so big that the government can't influence the business interests. There are government checks if they believe that a business is behaving in an anti-competitive way
Suppliers - May recieve increased sales. More competition as other suppliers want to supply the big business, have to drive a hard bargain
Local Community - Can cause traffic congestion and noise pollution. Large profits invest into the community and provide jobs. Pressure groups are created to reduce the negative impact of the business
PLC - Advantages and Disadvantages
1) Limited Liability
2) Much more capita from shares
3) Easier to grow and diversify
4) Firms status increase - banks more likely to lend money
1) Divorce of ownership
2) Always a risk of being taken over
3) Shareholders only look for profit - makes it hard to complete other objectives, like helping the environment
Business social costs and benefits
- Environmental costs
- Non-renewable materials used
- Some products are harmful to people health
- Ethical questioning e.g exploiting cheap labour unneccesary animal testing
- Tax from profits help to fund schools and hospitals
- Provide jobs for millions of people
- Provide essential services in order for the country to move forward
- Some firms produce products which are beneficial to health e.g. medicine
How social issues affect business decisions
1) Some firms now use fair-trade sources
2) Some firms aim to carry out ethical product development e.g. using non-toxic material
3) Some firms are trying to improve their products and packaging to make it more environmentally friendly.
4) Many firms are attempting to operate in a more sustainable way e.g. using more renewable energy sources
1) Gives firms a competitive advantage - a green and socially responsible image boosts sales. However it can cost quite a lot.
Why firms become Multinational
1) Keep transport costs to a minimum
2) Less risk from exchange rates fluctuations
3) More knowledge of the area you are selling into
4) Avoid trade barriers by producing within a country
5) Gain access to raw materials and cheap labour
6) With expert accountants , bigger companies can avoid paying taxes
7) They can win subsidies from governments and force workers to work at low wages by threatening to relocate elsewhere
MNE benefits for host country
1) Foreign investment - creates employment
2) Bring own work methods and foreign technology into the country
3) The profits from the business can be a source of taxation revenue for the governement
4) They are likely to export goods out the countries so it can be used to improve the countries balance of payments so they have more sales from exports then being spent.
MNE problems for host country
1) The jobs created by the MNE are normally unskilled, long hours and with low wages
2) In return for locating in their country, companies ask for subsidies and reduced tax or airport links and roads which can cost the government money
3) The MNE may kick out local industries as it is big and receives more economies of scale
4) They can exert a strong influence on the government to change laws that increase costs
5) Can cause environmental degradation as the owners are unlikely to live there and can not see the impacts
6) If MNE's locate in poorer countries, the disadvantages out weigh the advantages as in the end the company has only moved there to reduce costs and maximise profit
Product life cycle
1) Development - Where research and development and market research to place to create a marketable product. Scientific research is sometimes taken place in universities or in large business they have a group of applied scientists who try to use recent scientific discoveries to improve a product. The aim of this is to produce the most cost-effective materials and methods.
2) Introduction - This is when the product is released. Normally backed up by high amounts of advertisement and promotion. Place is an important factor.
3) Growth - Sales and profitability increase until the product becomes established
4) Maturity - Sales are at its peak, promotion does not need to occur at this stage. Business's attempt to make the product more widely available. The product then becomes saturated and unable to expand any further
5) Decline - Eventually sales decline as rival products take over and products become obselete
Sources of finance - Large firms
1) Retained profits - money available after all dividends have been paid
2) Re-invested savings - retained profits built up from previous years put in a bank savings account or used to buy stocks and shares
3) Fixed Assets - Unused equipment and machinery can be sold as fixed assets. There is a limit.
4) Shares - A limited company can issue more shares. More shares means less control for the owner
5) Debentures - long term loans from the public paid back with interest.
6) Loans/Mortgages - Has to be paid back with interest. Easier for large business's to receive loans and mortgages from the banks as they are less likely to fail.
Balance sheet terms
Fixed Assets - Machinery, premises or vehicle that can be sold and that lasts more then a year
Current Assets - Assets that last only a few months
Current liabilities - Bills the firm has to pay soon
Current Assets - Current liabilities = Net Current Assets
Net current Assets + Fixed Assets = Net Assets
Current ratio : Compares a firms current liabilities with its current assets
Current ratio = Current assets/Current liabilities
Acid test ratio = (Current assets - stock) / Current liablities
It assumes that the current stock won't sell
Centralised and Decentralised organisations
All major decisions are made by one person or a few senior managers. These normally have plenty experience and they can get an overview of the whole business. However, if the decisions are made by only 1 or 2 people, decision-making is slow. It can also take along time to reach the employees which means that the organisation reacts slowly to change. Senior managers at the top of the hierarchy are very powerful and if they lack knowledge or 'lose their touch' and start making poor decisions, it can affect the whole entire business.
This is when decision-making is shared out to regional managers or to more junior employees. The employees use expert knowledge of their section to make decisions and make them quickly. However, inconsistencies can occur throughout the business and the decision makers may not be able to see the overall needs of the business
Methods of motivation
Remuneration - paying staff money for the work they do. E.g. increasing salary, bonuses, pension payments
Training - Makes staff better at their jobs and normally motivates them as they know what they are doing, are able to work more efficiently and feel important to the business.
1) Authoritarian - make decisions along without consulting the staff - makes workers feel like they are not valued especially the able ones and demotivates the staff
2) Paternalistic - Make decisions themselves but only after consulting workers
3) Democratic - Managers allow some influence from the workforce over decisions
4) Laissez-faire - Managers let the employees to perform tasks how they see fit, offering help if needed - great for independent, motivated workers but a problem for staff who need support