What are the reasons for expanding a business?
- Can be more competitive
- More customers (appeals to those who prefer to purchase from larger firms) - more stock to sell - more sales revenue
- To become more financially secure
- To take advantage of economies of scale - firms can buy stock in bulk and make more proft on each item.
What are the risks of expanding a business?
- The firm may need to spend money on advertising, for example, or lower its prces both of which could damage profits.
- A larger market share brings with it more attention from the press and consumers.
- Businesses need to be careful that, as the company grows they don't become inefficient and find their costs actually increase.
-Even large businesses are vunerable, they are capable of larger profits, but also bigger losses, making a big mpact on the stakeholders.
What are Economies of Scale and Market Share?
Economies of Scale...
These occur when it becomes cheaper for a business to produce their products as they expand in size. They occur for many reasons, the main reason is that larger business can buy their raw materals in larger quantities.
A business's market share is the percentage of sales in a market that belong to that company.
What are the Advantages and Disadvantages of openi
- Growth is steady making it more manageable, also a business won't need to borrow so much money to fund it.
- Organic growth is too slow for some owners, it may take several years to double the size of the business.
-Market Share could fall - if other competitors are expanding more quickly
Why might firms expand inorganically?
Horizontally... - it increases market share - as the two businesses will be in the same market, eliminating competition. - Economies of scale are likely within horizontal integration as the firms are at the same stage of production.
Vertically... Backwards - offers a reliable supply of materials that will now be cheaper, now they can control the quality of the products made.which means less faulty products can be made. Forewards - The business will have more control over how their products are sold, priced and promoted.
Diversification... - If one industry sees a fall in demand another industry that the business is trading in may be expanding. They can support each ne ifthey aren't doing well. -It spreads risk over more than one industry.
What are the problems with inorganic growth?
- It can be expensive to take over another business.
- Inorganic growth means a business grows very quickly, this can make it difficult to manage efficiently.
- With vertical integration and diversification management may lack experience of these other businesses and the markets they sell in.
What is the difference between ltd's and plc's?
Private limited company (ltd)...
An ltd is a company owned by shareholders. The shares in a ltd can't be advertised to the general public, they can only be traded privately.
Public limited company (plc)...
A PLC is owned by shareholders. The shares can be advertised for the sale to the general public on the stock exchange, which means anybody can purchase a share in that company.
What are the objectives for growing businesses?
- To increase profit
- Managerial Objectives - to protect their own interests (e.g salary)
- Increase market share - this gives a business more reputation and power over their prices.
- Increasing shareholder value - they need to keep shareholders happy by providing more dividends and increasing the price share.
What should a business consider when locating a gr
- Sales potential and the most profitable where it is e.g how much footfall there is.
- Transport costs and how far the suppliers are from the business.
- low labour costs would be an advantage
- cost of the site or rent
- managers preferences
What are the benefits of locating abroad?
- lower cost of land
- lower labour cost in some countries, however the quality may not be as good.
- Avoid trade barriers, foreign countries charge british companies a tax to sell their products there.
- Take advantage of demand in other countries - many companies open locations abroad to try and sell products in those countries.
What are the problems with locating abroad?
- Language differences as well as cultural - this might lead to poor decisions being made or instructions not being understood.
- Transport costs increase - as goods need to be shipped back to the UK. This also increases pollution levels.
- Seen as being unethical - if the company closes its UK location and moves to low wage countries it may be seen as making unethical decisions.