Growing the Business Flashcards
Advantages of Organic Growth
-Relatively inexpensive as the business continues to focus on what it is already good at- making its existing products
-Firm grows slowly so it is easier to make sure quality doesn’t suffer and new staff are trained well
-Higher production means the business can benefit from economies of scale and lower average costs
-Maintains corporate culture as growth does not involve acquiring a new business
Disadvantages of Organic Growth
-Long period between investment and return on investment
-Growth may be limited and dependant on reliability of sales forecasts
-Higher production also mean the business can suffer from diseconomies of scale
Economies of Scale
-Larger firms need more supplies so will buy in bulk. This normally means they can get them at a cheaper unit price than a small firm.
-Larger firms can afford to buy and operate more advanced machinery than smaller firms which may make processes faster and cheaper to run.
-As the average unit cost is lower, firms can make more profit on each product sold.
-They can also afford to lower prices which may make customers more likely to buy their products leading to increased sales.
Diseconomies of Scale
-The bigger the firm, the harder and more expensive it is to manage properly.
-Bigger firms have more staff so it can be harder to communicate within the community.
-Decisions take time to reach the whole workforce so workers at the bottom of the structure may feel insignificant.
-In turn, they may become demotivated which may cause a decrease in productivity.
Methods of Organic Growth: Entering New Markets
-This means selling products to people that the business hasn’t before.
-Firms can use new technology to do this such as through e-commerce.
-Technology may also mean items are cheaper to produce so a business may lower its prices and target a lower income market.
-A firm could set up branches in other countries to sell directly in markets abroad.
-They could also change the marketing mix of a product such as price or promotion to appeal to a new market.
Methods of Organic Growth: Developing New Products
-Selling brand new products will increases sales for a business allowing it to grow.
-To sell a new product, firms need innovation which requires research and development.
-However, innovation can be risky as research and development takes time can be expensive and does not always succeed.
-it should be informed by market research to ensure that customers want the product before developing it and make sure it meets customer needs.
Advantages of Inorganic Growth
-Competition can be reduced
-Market share can be increased very quickly
Disadvantages of Inorganic Growth
-It can be expensive to takeover/merge with another business
-Managers may lack the experience to deal with the other businesses
-Clash of corporate culture may cause tension between employees
Methods of Takeovers
Join with a supplier- this allows a firm to control the supply, cost and quality of its raw materials
Join with a competitor- this reduces competition and gives the firm a bigger market share, so it will be a stronger competitor
join with a consumer- this gives the firm a greater access to customers and more control over the price at which products are sold
Join with an unrelated firm-this means the firm will expand by diversifying into new markets. This reduces the risks that come from relying on just a few products.
Methods of Merging
Horizontal- two competitors join. 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- a business takes control with another that operates at a later stage in the supply chain.
Backward vertical integration- a business takes control of a business earlier in the supply chain.
Conglomerate integration- 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.
Advantages of a PLC
- The business can now issue new shares to a large number of potential shareholders to raise capital for
expansion. Therefore, with the ability to sell their shares easily, shareholders may purchase large numbers of shares raising large amounts of capital to fund growth.
-The shareholders have limited liability
-There are increased negotiation opportunities with suppliers in terms of prices because larger businesses can achieve economies of scale
-Banks more willing to lend money to an established business as they see it as less risky
-Seen as more prestigious and potentially more reliable
Disadvantages of a PLC
-The issuing of new shares will dilute the existing owners’
percentage ownership of the company. Therefore, the original owners may lose control of the business that they helped to create, and the company may become part of a much larger one.
-Accounts have to be made public so anyone can see if a business is struggling
-There is a greater risk of a hostile takeover by a rival company
-Difficult to get lots of shareholders to agree on how the business is run. There will be hundreds of shareholders all wanting a share of the profits
Advantages of Retained Profits
-This may mean that the business does not have to use
other sources of finances such as share capital .
-Therefore, by using retained profit there would be no
need to dilute the ownership of existing shareholders
Disadvantages of Retained Profits
-Retained profit is often not large enough to be able to
fund the expansion plans of a business.
-Therefore, other sources of finance will also need to be used to fund the expansion plans which will either increase fixed costs (bank loans) or dilute the ownership of existing shareholders (share capital)
Advantages of Fixed 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 of Fixed Assets
-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
Advantages of Savings
This is the owner’s personal savings.
-Cheap, quick and convenient to access
Disadvantages of Savings
-The owner might not have enough savings
-Can’t use the cash for personal use
Advantages of Loan Capital
Loan capital is a lump sum of capital borrowed from a bank and paid back in instalments.
-Regular repayments are made over a period of time
Disadvantages of Loan Capital
-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 (security) in case the business fails to make repayments
Advantages of 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.
-Does not have to be repaid and no interest is applied
-A business can choose to whom it offers shares
Disadvantages of Share Capital
-Profits made by the business are paid to shareholders
-Control of the business gets diluted
Advantages of Stock Market Flotation
-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 of Stock Market Flotation
-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
