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Internal Growth
A business grows when it sells more output over a period of time. Business growth is often an important business objective because it may:
help to increase market share
improve profits
increase revenue
help a business to open more branches
Business growth can occur in a number of ways:
from employing more people
from opening more branches
from increasing sales or revenue
from increasing profits
Internal growth, or organic growth, occurs when a business decides to expand its own activities by launching new products and/or entering new markets. Businesses do this in order to improve their chances of increasing their customers, revenues and profits.
Many new businesses start out with one product idea. Once a business has a market it already sells to, it is easier and less risky to expand its product range with related products.
To ensure internal business growth is successful, a business can engage in research and development, which is work directed towards the innovation, introduction and improvement of products and processes.
An established soft drinks brand or manufacturer might start off selling one cola product. Because of changing tastes, competition and business growth, it might later expand its product portfolio with new drinks, such as vanilla cola, cherry cola, lemon cola and sugar-free cola.
Entering new markets - A business may decide to enter new markets to try to achieve growth. However, this comes with a higher risk than developing new products. This is because the business will not have dealt with these markets before, and entering the markets may be complex and expensive.
There are three ways a business can attempt to enter new markets:
entering overseas markets
amending its marketing mix (product, price, place and promotion)
taking advantage of technology
Entering overseas markets - A business that operates in a domestic market might consider beginning to trade in other countries to try to achieve growth. Operating in this way could give the business access to a brand new market, which could prove extremely successful and increase profitability. However, developing new, unfamiliar markets can be complex and expensive.
Amending the marketing mix - Whenever a business enters a new market, it is vital for it to re-examine its marketing mix. This is particularly important when a business is considering entering an overseas market, because the business might not know or understand the new market. For example, the price might need to be changed so that the product appeals to the new market. Alternatively, the new market might not know about the brand at all, in which case the marketing mix would need to be changed to encourage people to try it.
Taking advantage of new technology - Businesses may also take advantage of new technology to target new markets. For example, a business could use e-commerce to enable customers to buy products even if they do not live near its store. New technology may also mean items are cheaper to produce, so a business might be able to lower prices and target a lower-income market.
The advantages and disadvantages of internal (organic) growth
An advantage of internal growth is that it is low risk:
a business can maintain its own values without interference from stakeholders
higher production means the business can benefit from economies of scale and lower average costs
A disadvantage of internal growth is that it is slower growth:
there maybe be a long period between investment and return on investment
growth may be limited and is dependent on the reliability of sales forecasts
External Growth
Mergers and takeovers
External growth (inorganic growth) usually involves a merger or takeover. A merger occurs when two businesses join to form a new (but larger) business. A takeover occurs when an existing business expands by buying more than half the shares of another business.
An example of a merger - Business ‘A’ and Business ‘B’ each want to expand but do not feel they can get any bigger alone. The two businesses decide to come together and share their locations, stock, marketing, products and staff. This allows them to grow together as a single business.
An example of a takeover - Business ‘A’ decides it wants to grow but the area it wants to grow into is already occupied by a similar or smaller business; called Business ‘B’. Business ‘A’ decides to buy over 50% of the shares in Business ‘B’ in order to take control. This gives Business ‘A’ access to growth through ownership of a new business in either the same or a different area of the market.
Horizontal integration occurs when two competitors join through a merger or takeover. The new business then becomes more competitive and increases its market share. This gives it more control when negotiating and setting prices.
Forward vertical integration occurs when a business takes control with another that operates at a later stage in the supply chain.
Backward vertical integration occurs when a business takes control of a business earlier in the supply chain.
Conglomerate integration occurs when businesses in unrelated markets join through a takeover or merger. This enables businesses to spread their risk over a wider range of products and services.
The advantages and disadvantages of external (inorganic) growth
Advantages of external growth include:
competition can be reduced
market share can be increased very quickly overnight
Disadvantages of external growth include:
it can be expensive to takeover/merge with another business
managers may lack the experience to deal with the other businesses
Public limited companies (PLCs)
As a business grows, it may choose to become a public limited company (PLC). In a PLC, shares are sold to the public on the stock market. People who own shares are called ‘shareholders’. They become part owners of the business and have a voice in how it operates. A CEO (chief executive officer) and board of directors manage and oversee the business’ activities.
When a business sells shares on a stock market, this is known as ‘floating on the stock exchange’.
Advantages of being a PLC include:
the business has the ability to raise additional finance through share capital
the shareholders have limited liability
there are increased negotiation opportunities with suppliers in terms of prices because larger businesses can achieve economies of scale
Disadvantages of being a PLC include:
it is expensive to set up, requiring a minimum of £50,000
there are more complex accounting and reporting requirements
there is a greater risk of a hostile takeover by a rival company
SOURCES OF FINANCE FOR GROWTH
Capital found from within a business is called an internal source of finance, whereas capital found from outside a business is an external source of finance.
Internal sources of finance
Retained profits - Retained profits are profits held back in the business for reinvestment rather than being issued as dividends.
Advantages:
cheap, quick and convenient, and there is easy access to the money
Disadvantages:
once the money is gone, it is not available for any future unforeseen problems the business might face
Selling of assets - Another internal source of finance is by selling unwanted assets, such as machinery and equipment.
Advantages:
convenient, can create space for more profitable uses, and can be quick
Disadvantages:
the business might not get the full market value of the assets or even sell them at all
the business might also need the assets in the future
The owner’s savings - A third source of internal finance is the business owner’s own savings.
Advantages:
cheap, quick and convenient
Disadvantages:
the owner might not have enough savings or may need the cash for personal use
SOURCES OF FINANCE FOR GROWTH
Capital found from within a business is called an internal source of finance, whereas capital found from outside a business is an external source of finance.
External sources of finance
Loan capital - Loan capital is a lump sum of capital borrowed from a bank and paid back in instalments.
Advantages:
regular repayments are made over a period of time
Disadvantages:
sometimes it can take a while for a loan to be approved and the business may not even qualify for a loan
interest is applied, so this can be an expensive option
banks may also ask for collateral (security) in case the business fails to make repayments
Share capital - Share capital is money raised when a business becomes a private limited company by offering shares to a select group of people in return for capital.
Advantages:
does not have to be repaid and no interest is applied
a business can choose to whom it offers shares
Disadvantages:
profits made by the business are paid to shareholders (these payments are also known as dividends), so control of the business gets diluted
Stock market flotation - Stock market flotation is money raised when a business becomes a PLC (public limited company) by offering shares to the public to buy.
Advantages:
this option can raise large amounts of capital as it is easy for the public to buy shares through a stockbroker or bank
the shares don’t have to be repaid and no interest is applied
the business can also gain recognition through this method
Disadvantages:
it can be complicated and expensive and there is the possibility of losing control, as anyone can buy shares
the profits are paid to shareholders and the business records are made public
there is also the risk that some investors will only buy shares to make a quick profit by selling them when the share price increases
WHY BUSINESS AIMS CHANGE
In response to market conditions
An aim is an overall goal, and objectives are the steps needed to achieve it. As a business grows, its aims and objectives change. One of the main reasons for this is that market conditions change. The term ‘market conditions’ refers to the size of the market, the business’s competitors, and the proportions of large and small businesses in the market.
If a business is in a growing market, over time its aims and objectives may change to focus on growth. An example of this would be a company focused on sustainable products, such as biodegradable packaging, where demand is growing.
If a business is in a market where there is suddenly an increase in competition, its aims and objectives may have to change to focus on survival, which is when a business aims to keep its day-to-day operations running.
In response to new technology
As technology continuously evolves, business aims and objectives also change. Common technological developments include:
website developments
manufacturing developments
software developments
mobile technology developments
contactless, online, and mobile payment system developments
Technological developments may prompt a business to develop new aims and objectives. For example, a business might create new innovative products or services, increase the amount of revenue it receives through a certain payment method, or develop new manufacturing methods.
An example of where technological developments have changed businesses’ aims and objectives is in the car industry. Many car manufacturers are now focusing on green technologies, such as electric cars, rather than the traditional petrol or diesel cars.
In response to performance
Often, a business will create new aims and objectives linked to its performance. For example, businesses will often look at where they can make improvements to their sales revenue or profit, the impact of their marketing, or their productivity.
If a business has suffered with poor financial performance in the previous year, it may have aims and objectives relating to improving its sales, revenue or profit over the next financial year. Often, even when a business is performing well financially, it will aim to improve and grow over the next year.
In response to legislation
Occasionally, government legislation is introduced that has an impact on a business’s aims and objectives. There are a set of laws specifically for businesses that govern how they operate. Examples include the Health and Safety at Work etc. Act (1974), the Equality Act (2010) and the National Minimum Wage Regulations (2016). Laws and regulations are legally binding, and businesses must comply with them to keep operating. Legislation may relate to areas such as recruitment, payment, health and safety, and competition.
If a new law is introduced or changed, eg if there is an increase in the minimum wage, a business may change its aims and objectives to accommodate this change.
In response to internal reasons
Internal reasons, such as strategic decisions made within a company, can impact a business’s aims and objectives. For instance, if a business decided to enter a new market or develop a new product or service, these changes would be in response to internal reasons. For example, a business might decide to sell its products to a country that it had not previously sold to. In this case, the business would have changed its aims and objectives to focus on entering a new market.
Focusing on Survival or Growth
New and existing businesses rarely want to stand still and simply keep the position they have in a market. Instead, they are likely to focus on either survival or growth.
Two types of business primarily focus on survival:
new businesses in their first year of operation
established businesses under threat, for example from their competitors
However, over time, as a business becomes more recognised and achieves a secure position in the market, it may change its aims and objectives to focus on growth.
On some occasions, established businesses in very competitive environments may be forced back into a position where survival becomes their main aim. This could be due to low sales, increasing competition, changes in trends and tastes, poor economic performance, or an overall change in market conditions.
Entering or Exiting Markets
A common growth strategy for businesses is to enter new markets. A new market could consist of a different age group or gender, or in some circumstances it could be customers in another country. The aim of entering new markets is to grow the business overall, develop a new target market, and ultimately grow the business’s market share across multiple markets. An example of this would be a women’s fashion retailer introducing a range of men’s clothing.
Businesses also occasionally exit markets. They do this for a number of reasons, for example:
a shrinking market
poor performance of the business products
a new market opening up
the business failing overall
Often, exiting a market is seen as a survival strategy for a business. An example of a business in the UK that has exited a market is Morrisons. This supermarket chain did not have the money to invest in the convenience store market like Sainsbury’s or Tesco, so it focused on its larger supermarket stores instead.
Growing / Reducing the Workforce
Growing / Reducing the Workforce
When a business is expanding and performing well, some of its aims and objectives may focus on growing its workforce. This may include opening new departments, creating new teams and recruiting more staff. By growing its workforce, a business gains more potential for expansion.
Reducing the workforce is usually part of a survival strategy for a business. When a business is not performing well or is exiting a market, it may reduce its workforce to help reduce its overall business costs. However, occasionally, a reduction in a workforce is part of a business growth plan involving technology. For example, in the banking industry, many high street branches have closed due to the huge increase in the use of online banking and automated cash machines.
Increasing / Decreasing the product range
Increasing / Decreasing the product range
Businesses often start with a small number of products, but over time they may expand their product range as they grow. For example, a technology business could begin by making a range of computers, but over time it could expand into developing mobile phones and televisions.
Sometimes a business will increase its product range to compete with other businesses. Having a larger product portfolio allows businesses to manage their risk, because if a product is not performing well, the business can rely on its other products to produce revenue.
When a product is not generating enough revenue or a business is failing, the business will often decrease its product range. Usually a business will do this either to allow them to focus on their existing products or to develop a new product range in a different sector.
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