Growing the Business

Business Size Measurement:

• Current value of the business- share capital.
• Brand Power.
• Profit/ Sales Turnover.

Benefits of Growth:

• Increase Sales, Profit, Market Share.
• Increase brand power.
• Economies of Scale = lower average cost = increase profit margin.
• Survival if in a growing market.

Problems of Growth:

• Lack of Demand.
• Lack of ability to obtain sufficient capital.
• Failure to track investors when issuing and selling shares.
• Dilution of business.

Orgainic Growth- where a business grows internally or by itself, without merging with or taking over any other businesses.

Organic Growth Methods:

• Opening new branches.
• Expand product range.
• Celebrity endorsement.
• Increase advertising.
• Sales promotions.
• Sponsorship.
• Expand distribution channels- online selling.
• Product placement.
• Sell franchises.
• Lower prices if it is elastic demand.

Merger- where 2 businesses join together to act as one. Sony Ericsson. Lloyds TSB.

Takeover- where one business buys out another business so that business ceases to exist. Takeover's can sometimes be friendly when the takeover firm agrees to sell, or they can be hostile when they are forced to sell. If the brand name is strong, they may carry it on.

Horizontal Integration- where you merge/takeover a business in the same industry and same stage of production. Most common type of integration. Nestle & Rowntrees. Lloyds TSB.

Advantages:

• Economies of Scale.
• Brings new skills and expertise already from the same industry.
• Instant increase in market share.
• Eliminating the competition.

Vertical Foward integration- merge/takeover a business in the same industry but further along the production process. Clothing Manufacturer > Clothing retailer.

Advantages:

• Guarenteed shelf space.
• Keep full selling price = increased profit.

Vertical backward integration- merge/takeover a business in the same industry but further back along the production process. Retailer > Manufacturer.

Advantages:

• Guarenteed supplies.
• Ability to tailor the supply to meet your needs.
• Lower prices = higher profit margins.

Diversification-merge/takeover a business in a completely different industry.Virgin Media/Trains

Advantages:

• People willing to give chance because of brand name.
• Increased appeal to different customers.
• Increased brand power and brand awareness.
• Spreads the risk and effects of failures.

Disadvantages of Inorganic Growth:

• Very expensive- especially if hostile takeover.
• Expensive loans with high repayments.
• Issuing and selling shares results in dilution of control.
• Possible redundancies can demotivate remaining staff.
• Negative media opinion can affect sales.
• Risk of going into new market.
• Culture clashes.

Similarities:

• Both pay corporation tax.
• Owned by shareholders, run by Board of Directors.
• Limited liability.
• Incorporated businesses that are known as a company.
• Can issue and sell new shares to raise finance.

Differences:

• PLCs require £50,000 share capital, therefore a longer set-up process.
• PLCs can advertise and sell shares on the stock market.
• LTDs can only sell shares to families, friends and private investors.
• PLCs have no control over who buys shares.
• LTDs directors have to agree over who buys them.

PLCs are companies that can issue and sell new shares on the stock market, but has to have £50,000 share capital. It has limited liability.

Main Aims- Profit, market share, growth.

Ownership- shareholders.

Control- Board of Directors and day to day managers.

Financial provider- shares, retained profit, bank loans.

Advantages- Limited liability. Shares sold on stock market. Economies of Scale. Easier to expand. No restriction on transfer of shares.

Disadvantages- Expensive set-up costs. Annual reports published by law. Conflict of interest between managers and owners. Slow decision making. Minimum share capital of £50,000

Aim- long term goal that you are working towards, objectives help work towards that.

Objective- short term targets that eventually help to meet the long term goal.

Key objectives for larger business:

• Opening up new branches.
• Expand nationally/internationally.
• New product range to appeal to different market segments.
• Maximise sales and profit- retained profit needed for reinvestment.
• High profits needed to satisfy shareholders.
• Increased shareholder value.
• Attract further investment.
• Customer satisfaction = repeat custom.
• Increase brand awareness.
• Increase market share.
• Social objectives- corporate social responsibilty (CSR).

Stakeholder- any individual/group who can influence the actions of a business or be affected by what the business does.

Growth benefit to owners:

• Profits = higher dividends.
• Profits = increased shareholder value.

Growth problems to owners:

• Dilution of ownership and control.
• Use of retained profit = lower dividends.

Growth benefits to employees:

• Job security.
• Possible pay rise and bonuses.
• Promotion opportunites.
• Profit sharing.

Growth problems to employees:

• Redundancies due to new machinery.
• Heavy workload before new staff recruited.

Growth benefits to managers:

• Job security.
• Possible pay rise and bonuses.
• Promotion opportunities.
• Profit sharing.

Growth problems to managers:

• Heavier workloads.
• More staff to supervise.
• Pressure of responsibility

Growth benefits to customers:

• Higher quality products.
• Lower prices due to economies of scale.
• More choices of where to buy from.
• Wider variety of products.

Growth problems to customers:

• Loss of personal touch/focus on core customers.
• Higher prices to cover expansion costs.

Growth benefits to suppliers:

• Increased demand = more sales revenue.
• Increase prices to raise profit margins.

Growth problems to suppliers:

• May not be able to meet demands and could lose the customer.

Growth benefits to Government:

• More jobs created.
• Helps economy grow.
• Higher corporation taxes.

Growth problems to Government:

• Companies finding legal loopholes.
• Dominant market position can exploit consumers.

Divorce of ownership & control:

• Shareholders have no say in the day to day running of the business.
• Shareholders want to maximise profits.
• Managers don't as they don't keep profits.
• Profit sharing as part of manager rewards make them care.

Social Responsibilty- the duty of a firm to behave in an ethical manner towards its shareholders

Examples:

• Good working conditions.
• Paying the Living wage.
• Fairtrade scheme
• Sustainabilty.
• Using local resources to reduce food miles.
• Using renewable resources.
• Recycling
• Safe disposal of waste.
• Local community schemes.

Corporate social responsibilty- the growth of media platforms that businesses cannot get away with unethical behaviour, as news spread quicker and can damage reputation. Some businesses use it as a USP.

Benefits:

• Improved reputation and public image = higher sales revenue and profit.
• Provide more brand awareness to the company.
• Job satisfaction and motivation for employees.
• Sustainability for business.
• Possible USP = higher selling price = higher profit margins.
• Government more likely to provide contracts to ethical businesses.

Problems:

• Increased production costs- Fairtrade.
• Customers unwilling to pay higher price.
• Attract media and customer attention and can damage reputation if caught overexaggerating or lying.

Social Costs- the entire cost to society of a business action. It includes both internal costs to the producer or consumer, but also external costs to third parties.

Social Benefits- entire benefit to society of a business action.Includes both internal/external costs

Expanding a factory loacated close to a community:

Benefits:

• Job creation = higher standard of living.
• Increases demand for other local businesses and helps local economy grow.
• Improved transport links for residents.
• Rising house values

Costs:

• Factory pollution = breathing problems = higher NHS costs.
• Noise pollution.
• Increased traffic conjestion.

Factors:

• Room for expansion.
• Availability of employees and labour cost.  
• Cost and Availability of supplies.  
• Cost of Land.
• Location of target market.
• Location of competitors.

Globalisation- increasing trend for goods to be traded internationally and for companies to locate abroad. A multi-national company that has operations and production in more than one country.

Off-shoring- making products or parts of products in other countries. Services are also off-shored or outsourced (call centres in India).

Advantages:

• Reduce production costs = increase profit margins
• Lower selling price = increase sales revenue if elastic demand.
• Lower labour costs.
• Lower land costs.
• Lower raw material costs.
• Access to new markets and wider customer base.
• Allows access to fast-growing markets when domestic markets are saturated.

Disadvantages:

• Loss of focus on core customers = lower customer satisfaction = lower repeat custom.
• Negative media reports = damage to public image.
• Higher transportation costs = higher carbon footprint.
• Language barriers and time-zone differences.
• Possible quality issues.
• High competition in new market.