Growth

Business Success

Signs of Success 

  • A business is planning to expand and buy a second shop.
  • Their cash flow forecast is healthy showing little liquidity problems and they will be able to pay suppliers and wages keeping their reputation.
  • A business has upgraded its shop fittings. 
  • The sales levels are good and profits are being made.
  • Able to meet all expenses and have no liquidity issues.

Signs of Failure 

  • Fall in profits/ net profit % falling/lower ROCE.
  • Redundancies – staff being let go due to less demand and the business trying to cut costs.
  • Branches closing down.
  • Constant special offers and closing down sales
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Advantages

  • Increased profit in the long term and increased sales as they will have  a wider market to aim to increasing market share.
  • Business gains a better reputation/ brand improves/competitive advantage.
  • Possibility of increased capital helping to aid further growth as banks will usually be more willing to loan money
  • Economies of scale allows for lower prices or increased profits if they keep prices the same.
  • Economies of scale is the saving in average cost of production or unit costs, which is achieved by increased levels of production
  • Purchasing: A business might buy in bulk at lower cost – bulk buying.
  • Marketing: Costs such as advertising could be spread over the two shops- marketing.
  • Financial: May benefit from better interest rates on loans – financial and easier to gain loans from a bank or investor. Administration costs may be shared between the shops
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Disadvantages

  • Possibility of poorer communication and co-ordination problems because the business becomes larger leading to inefficient business activity as staff may not be closely monitored or not know what is expected from them leading to mistakes being made or incorrect decisions
  • Possibility of lack of motivation because workers and management do not know each other leading to dissatisfaction in the job and could mean staff may leave increasing labour turnover and recruitment costs.
  • Cost of additional capital expenditure for growth may affect the cash flow position of the business or a loan may have to be taken out putting the business under financial pressure which can prove risky.
  • Time consuming to carry out growth especially internal growth and this can take management’s attention away from other areas affecting the reputation.
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Internal/Organic growth (1)

DefinitionInternal/organic growth is growth which takes place inside the business organisation and without reference to other business organisations.

Methods of Organic growth

  • Expansion of existing business/open new branches/increasing employees
  • Opening another retail outlet.
  • Introduce new products.
  • Develop new market.
  • Plough back profits.
  • Increasing sales
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Internal/Organic growth (2)

Advantages 

  • Economies of scale. 
  • Diversification - can produce more products and can sell into different markets which spreads risk. 
  • Dominatio of the market - the larger the market share a firm has, the more it can control the price of it's products due to increased sales activity. 

Disadvantages 

  • Time - it acn take a long time to achieve internal growth, some owners may not want to wait that long.
  • Impact of failure - thsi cost the business financially, damage their reputation and affect their opportunity cost.
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External Growth (1)

Merger 

A merger is an agreed joining of two businesses in order to form one larger business. When a merger takes place, it is usual for all the assets to be brought into the new business. 

Advantages 

  • Economies of scale 
  • Increases market share 
  • Eliminates a competitor 

Disadvantages 

  • The company would lose control of its operation as they will now have to share decision making with another business.
  • Company may be moved to a new site which could lead to unhappiness amongst staff and affect productivity during the move.
  • Possibility of staff redundancies as there is no need for duplication of roles which could lead to a fear of job security for staff-demotivation
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External Growth (2)

Takeover

One business takes over another by buying a majority shareholding. 

  • Friendly - the business may offer existing shareholders very high prices for their shares 
  • Hostile - business could buy a large no. of shares on the stock market without the board of directors' approval so that it could control the voting in the other business. 

Advantages

  • Firm can benefit from economies of scale.
  • Eliminates a competitor.

Disadvantages

  • Friction can be caused between staff.
  • Staff can face redundancy.
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Integration (1)

Horizontal - Same Industry and Same Level of Production  

E.G. IAG buying Aer Lingus 

Advantages 

  • It reduces competition, thus increases market share/market power. 
  • Gain new ideas from the other business.
  • It may experience economies of scale (decrease in average costs=efficient use of resources=more profit.
  • The new business may not need all of the workers. They could to become efficient and make more remove some workers profit 

Disadvantages 

  • The businesses may have different objectives and targets.
  • It costs a lot of money to merge with or takeover another business. 
  • They may have to pay higher prices due to lack of competition.
  • Less choice for consumers
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Integration (2)

Vertical : Forwards- taking over or merging w/ a business at the previous stage of production E.G. sweet factory buying a sweet shop

              Backwards- Taking over or merging with a business at the previous stage of production e.g chocolate factory buying a cocoa farm

Advantages

  • It has the advantage of cutting costs by reducing the profits, or reducing costs made at different stages of production.
  • It also controls the quality and delivery of materials right through the production process. 
  • Increased control of the market. 

Disadvantages 

  • Increase in costs e.g. May need to appoint staff to run the business.
  • Inexperience in the field could prove costly.
  • Possible diseconomies of scale that may arise in terms of administration.
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Integration (3)

Lateral - Similar but Not Identical Business

Advantages

  • Gain ideas from merging or taking over a business in a linked field.
  • Economies of scale negotiated with linked suppliers.
  • Joint production opportunities/joint marketing – lowering costs

Disadvantages 

  • Lack of specialisation in one field.
  • Diseconomies of scale could occur e.g co-ordination/control problems.
  • Communication problems as business has become bigger – demotivation amongst staff
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Business Growth

Factors that limit growth

  • Lack of finance – capital may be needed to buy new buildings, machinery and equipment or development products and if they do not have this it will restrict growth potential.
  • Strong competition – if there is a lot of competition it can make it difficult to increase market share and get ahead of competition as well as attract consumers away from other strong brands due to loyalty making it difficult grow.
  • Changes in consumer tastes – demand for particular product can increase or decrease. Consumers may be spending more on leisure facilities leading to growth opportunities for gyms.
  • Lack of demand due to factors such as recession – housing market or luxury goods like holidays so demand may fall and this will mean growth may have to be put aside and survival could be key.
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Social and Moral implications

Positive social/moral implications of growth :

  • The business will be able to provide more employment/increased wages improving standards of living and meaning less pressure on the government with benefits etc.
  • Consumers will have a greater variety of goods leading to more choice and value for money as goods should be cheaper for consumers due to economies of scale.
  • Will bring more money into the economy as employment will mean more spending in the local economy creating even further jobs and allowing other businesses to succeed

One negative social/moral implication of growth:

  • Smaller businesses in the area may be forced to close – damaging the local community with job losses, less choice for customers as well. 
  • Service may be less personal compared to smaller businesses and customers may not be happy with this.
  • Traffic Congestion-can lead more pollution in areas affecting quality of living. e.g. noise and air pollution 
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