Business Studies Unit 2

Introduction to growth

A business may grow through:

·         Internal Growth (also called organic growth) by selling more of its own products

·         External Growth (also called integration) by joining with another business

·          Selling franchises – this involves selling the rights to the business’s name and products to another business

External Growth:

This occurs when firms join together.  This can be in a number of ways:

·        

•       A merger – this is when the firms join together to make a new firm.  The shareholders of each of the individual firms become shareholders in the new, bigger business.
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• •    A takeover (or acquisition) – this occurs when one firm gains control of another and buys it up.

Types of integration:

·         Horizontal Integration – occurs when one firm joins with another firm at the same stage of the same production process.  E.g. if Walkers were to buy another crisp manufacturer such as Tayto

Vertical Integration – occurs when one firm joins with another firm at a different stage of the same production process.  This can be backwards vertical integration when a firm joins with its suppliers, or forward vertical integration, when a firm joins with its distributors

 Conglomerate Integration – occurs when one firm joins together with another firm in a different type of production process

Advantages of Integration:

·         Horizontal Integration – can lead to economies of scale (average costs falling as production rises)

·         Vertical Integration – can ensure a firm keeps control of its supplies or distribution, which can improve quality and reliability and reduce costs

·         Conglomerate Integration – can spread risks as a firm is operating in more than one market.  This means a fall in demand in one market may be offset by an increase in demand in another

Disadvantages of Integration: Any form of integration can lead to problems:

·         Diseconomies of Scale – are the problems involved with controlling, communicating  and motivating staff in a bigger business

·         Culture Clashes – can occur because firms are used to doing things in different ways.  Different policies and approaches can lead to arguments and inefficiency

Advantages of selling franchises:

·         The franchisor gets a fee from franchisees and a percentage of their profits 

 ·         The franchisee provides most of the finance to set up the new outlet.  This means the overall business can grow much faster than if the original business had to provide all the money for new stores

·         The franchisee takes a major proportion of the profits and so should be very motivated to make the business a great success; this way everyone can benefit

·         Franchisees can learn from each other, which helps the business overall to do better and therefore make more money

Disadvantages of selling franchises:                                                                     

 ·         The original entrepreneurs no longer own the entire business; most of the profits go           to the franchisee

 ·         If there are quality problems with one franchisee this can damage the whole                     business.  It is important, therefore, to keep a good check on the quality of all the             franchisees

Advantages of growth for the stakeholders:

·         Employees may have more job security and receive greater rewards.  They might be proud and want to stay for longer

·         Suppliers may benefit from additional orders and more opportunities to supply the bigger business

·         The local community may benefit if the business has more finds to invest.  It may recruit people locally, thereby helping the community to grow

Disadvantages of growth for the stakeholders:

·         Suppliers may be bullied by a much bigger firm.  A big firm may demand lower prices because it is buying so much.  Suppliers may be so reliant on the big business that they cannot refuse

·         Employees may no longer feel part of the business

·         Communication can be difficult

There are various ways in which stakeholders can protect their interest depending on the group and the issue.

 Lobby government: Stakeholders can try to get the government to force the business to change its policies, perhaps by changing the law or by preventing it from getting any bigger.  This includes things such as marches or petitions

 Boycott the products: if customers feel that a business is behaving badly they can stop buying the product; this may force the business to change its policies

 Strike: this is when employees stop working and bring production to a halt. Strikes may occur if employees feel they are badly treated or underpaid

 Complain: employees, suppliers, the community or the government could complain to the business (or the media).  If they argue well enough, the stakeholders may succeed in getting the business to change its approach

 Vote or sell their shares: if shareholders do not like some of the decisions that managers are taking, they can vote against them at the Annual General Meeting.  They could also call for the directors to resign. They can also sell their shares, which is likely to drive the price down and put pressure on the directors to do something to keep the shareholders happy

Company Types:

·         A Private Limited Company – cannot publicly advertise its shares for sale and is often owned by family members.  In a private company it is possible to place restrictions on who shares can be sold to.

·         A Public Limited Company – can advertise its shares and can be listed on the Stock Exchange.  It must have a share capital of £50,000.  It is not possible to place restrictions on who the shares are sold to.

Public Limited Companies

Advantages; Advertise shares to general public.  Therefore has access to a greater number of potential investors and may raise large sums of money

More media coverage – cheap publicity

Thought to have more status – can impress customers

Investors are more willing to buy shares as they can sell them on easily

Disadvantages of being a plc

Media coverage could be negative if the company makes a mistake

No control over the purchase of shares – managers may find a competitors buys the shares

More regulated – must produce detailed accounts by law

When changing from a Ltd to a plc – outside investors may clash with current ones

Divorce between ownership and control:

The owners of a company are the ‘shareholders’.  The people who control the company and make the decisions every day are called ‘managers’.  In private limited companies the shareholders are the managers.  However, in public limited companies the shareholders and managers are often different groups of people and this creates a divorce between ownership and control.  It is possible that the owners and managers have different objectives and this can cause conflict.

Other forms of Company:

·         A holding company – a business that holds shares in other company but does not actually produce anything itself.

·         A subsidiary company – a business that is owned by another.

Why do Aims and Objectives Change?

As businesses grow their objectives change from survival to other more appropriate objectives as listed below:

Growth:

Once a business becomes established they will want to grow their business.  Bigger businesses have access to better sources of finance, are better known and therefore have higher sales.  Growing also means gaining market share – the larger the percentage of market share a business has the greater control they have over the market.

Innovation:

Typically, businesses start with a limited range of products and services.  Once the business has established itself, the owners and managers may set targets to increase the number of new products on the market.  Such innovation may give it an advantage over competitors and lead to more sales and profits over time.

Diversification:

Diversification is when a firm moves into a new market.  By diversifying, a firm may be able to spread its risks.  If there are problems in one market these might be offset by gains in another.  However, managing various types of products can be difficult because of the different challenges and decisions involved.

Going International:    

Many businesses start off within their own region or country.  AS they expand, they then often start to get orders from abroad.

Ethical and Environmental Considerations:

Business ethics refers to whether a business decision is seen as morally right or wrong.  An ethical decision is made on the basis of what you think is right.  Ethical considerations include the use of child labour, type of advert, ingredients and whether suppliers are paid on time.  Environmental considerations include whether or not the company recycles, whether they conserve energy and what their emissions levels are.

Introduction to Changing Location:

Changing location is likely to involve a large sum of money.  It could also involve a high degree of risk.  If demand does not turn out to be as high as excepted the business will be committed to bigger/additional premises and the associated costs.

Overseas Location:

Advantages to locating overseas

Disadvantages to locating overseas

Cheaper Labour

Different rules and regulations – affects how products are advertised

Access to resources that are not available in the UK

Different culture – affects how staff are treated

Financial incentives from foreign governments

Avoids protectionist measures

Markets overseas may be growing fast.

Protectionist measures: are policies that governments use to protect their own businesses against foreign competition

Import: a product bought from abroad

Quota: a limit on the number of foreign goods imported into a country

Tariff: a tax on foreign goods imported into a country.