topic 5.3 edited

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  • Created by: teachface
  • Created on: 17-12-14 12:37

Internal growth/ organic growth

Internal growth - occurs when a business increases in size by selling more of its goods/ services without taking over or merging with other businesses.

Profits can be ploughed back into the business to fund expansion

Changing the marketing mix -e.g. greater use of promotion should increase awareness of the product and encourage more sales.

New product development - identifying new products or services that will lead to increased sales for a business.

Innovation - the process of transforming an invention into product that customers will buy. It is the commercial exploitation of an invention.

Research and Development (R&D) - the process of creating and designing new products and new methods of reduction

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External growth/ inorganic growth

External growth - where a business grows in size due to merger or takeover.

Takeover - Where one business buys another business.

Merger - Where two or more firms agree to join together. This is a voluntary agreement and results in the new business retaining the identity of both businesses.

Conglomerate merger - occurs when two business join which have no common business interests. E.g. a pub merging with a clothes shop, these businesses have no common interest.

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Merger/ Takeover Methods

-Both merger and takeover can take place at different stages of the production process.

Horizontal integration - between two businesses at the same stage of the production process. e.g a pub merges/ takes-over a pub.

Backward vertical integration - two businesses at different stages of the production process. e.g. a pub merges/ takes-over a brewery.

Forward vertical integration - two businesses at different stages of the production process join together e.g. a pub merges/takes-over a night club, ( a business which is further forward in the chain of production.

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Why businesses grow

Economies of scale - the factors which cause the average cost of producing something to fall as output rises.

Bulk - buying (commercial economies) - occur when business can gain discounts on large orders from suppliers.

Technical economies of scale  - reductions in average costs of production due to the use of more advanced machinery.

Market power - a measure of the influence of a business over consumers and suppliers.

Diseconomies of scale -  the factors which cause average costs of production to increase as outputs increases.

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Benefits of business growth...

+ survival - larger businesses have a greater chance of survival, greater revenue, money that can be re-invested into the business.

+ larger returns for owners- larger businesses have greater owners, leads to higher profits.

+  economies of scale - average costs of production reduced, leads to higher profits.

+ spreading the risk - where a business grows by developing new products or by branching into new markets risk can be spread and therefore reduced.

+ greater market power – the higher the market share, the greater the market power is likely to be. If a business is the main supplier in a market it can potentially charge higher prices to customers and negotiate favourable terms with suppliers.

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Drawbacks of business growth

Diseconomies of scale

- Co-ordination of the business becomes more difficult, communication becomes more problematic.

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Monopoly Power

Monopoly - a business which has a market share of 25% or more and can therefore influence the market. In a pure sense a monopoly exists when there is only one seller.

Patent - a legal protection for business's new ideas. This prevents other businesses stealing ideas from other companies.

Natural monopoly - where one large business can supply the market with products at lower costs than if the market was supplied by many producers.

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Monopoly power bad…

·         Price – if there is little competition then businesses can charge higher prices

·         Choice – lack of competition restricts choice for consumers

·         Excessive profits – monopolies can often make very high profits because of the lack of competition

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Monopoly power good…

·         Value for money – large businesses can often produce at lower average costs than smaller businesses and can therefore charge lower prices

·         Developing new products – New Product Development (NPD) process is so expensive process that without some sort of monopoly it might never happen. Patents are used to protect the business idea.

·         Natural monopoly –sometimes, in order to gain economies of scale and reduce wastage, it is more cost effective for one large business to supply the market, rather than many producers.

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Can big businesses be controlled?

Regulators –independent bodies set up by the government to monitor and regulate business activity

Competition commission –investigates mergers, markets and regulated industries under UK competition law. It has the power to block mergers if the merger would give the business more than 25% market share. The role of the competition commission is to

*monitor prices

*monitoring the quality of services provided,

*check that businesses are acting in the public interest

EU regulation –businesses in the UK are also affected by EU laws, such as the EU Competition Commission

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Can big businesses be controlled? 2

Self regulation –where an industry sets its own rules and guidelines and monitors its own actions. E.g.

*Financial Services Authority (FSA)

*Ofgem –regulates the gas & electricity industry

Pressure group –an organisation which aims to influence the decisions of businesses, government and individuals.

*Green Peace

Trade Union –a group which represents the interest of workers and negotiate with businesses on the workers’s behalf

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