Methods of Growth (OCR GCSE Business)

Why Businesses Grow

• Many firms start small and go on to grow into large companies or even multi-national corporations (E.g. Amazon started in a garage)

• Growth can involve a business changing its form of legal ownership

  • E.g. A sole trader looking to grow may seek a partner, while a private limited company may pursue flotation to become a public limited company

Reasons why Businesses grow

• In some cases, a business may look to become smaller

  • Retrenchment involves a business scaling down its operations as it evolves and can involve

    • Reducing the size of the workforce

    • Closing less profitable outlets

    • Exiting existing markets

  • Retrenchment can help a business reduce costs and is particularly relevant for businesses whose objective is to survive

Organic Growth

• Business growth can be achieved by growing organically, or inorganically (mergers and takeovers)

  • Organic growth is driven by internal expansion, usually using reinvested profits or loans

• Organic growth can be achieved in a number of ways

Ways to achieve organic growth

Increasing output

• Investing in new technology or production machinery can increase the volume and quality of output

• Increasing the size of the workforce is particularly useful for businesses that provide a service

• Outsourcing production to other trusted businesses can be a low-risk option to increase output without the expense of capital investment

Gaining new customers

• New customers can be attracted to new outlets or e-commerce websites

• Expanding into international markets can allow a business to reach vast numbers of new customers

Developing new products

• Increasing the product portfolio involves varying the range of products or services a business offers

  • Carrying out research and development into existing products or innovation can help a business vary its product range

• Introducing brand extensions, which use an established brand name or trademark on new products

Increasing market share

• Market share is the portion of a market controlled by a particular company, brand or product

• Market share can be increased in several ways, including:

  • Increasing promotional activity

  • Establishing new distribution channels

Examples of Organic Growth

Evaluation of Organic Growth

External Growth

• External growth involves integrating with one or more other businesses through mergers or takeovers

  • A merger occurs when two or more companies combine to form a new company

    • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity

  • A takeover occurs when one company purchases another company, often against its will

    • The acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations 

• There are several reasons why companies may choose to grow through mergers or takeovers

Diagram: Reasons for takeovers and mergers

Reasons for external growth

Strategic fit

• A company may acquire another company to expand into new markets, diversify its product offerings, or gain access to new technology

  • E.g. in 2010 Kraft Foods purchased Cadbury's to increase its product offering and expand business sales in the United Kingdom

Lower unit costs

• Larger companies are able to achieve lower unit costs as they receive many benefits from being large

  • E.g. bulk purchase discounts on supplies and better interest rates from banks on loans

Synergies

• Synergies are the benefits that result from the combination of two or more companies

  • E.g. increased revenue, cost savings, or improved product offerings

• Elimination of competition

  • Takeovers are often used to eliminate competition, and the acquiring company increases its market share

    • E.g. Meta, the parent company of Facebook purchased WhatsApp in 2014 and continued to run the messaging service alongside their own Facebook Messenger

  • Successful small firms are often taken over by larger rivals, making their founders very wealthy

Shareholder value

• Mergers and takeovers can also be used to create value for shareholders

• By combining companies, shareholders can benefit from increased profits, dividends and higher share prices

Types of External Growth

• Businesses join together in one of three ways

  • Vertical integration

  • Horizontal integration

  • Diversification

• Vertical integration involves a business merging with or taking over another firm in the supply chain or at a different stage of the production process

• Forward vertical integration involves a merger or takeover with a business further forward in the supply chain

  • E.g. A dairy farmer merges with an ice cream manufacturer

• Backward vertical integration involves a merger or takeover with a business further backwards in the supply chain

  • E.g. An ice cream retailer takes over an ice cream manufacturer

Evaluation of Vertical Integration

• Horizontal integration involves a business merging with or taking over a business at the same stage of the production process

  • E.g An ice cream manufacturer buys another ice cream manufacturer

Evaluation of Horizontal Integration

• Diversification, sometimes known as conglomerate Integration, involves a business taking over or merging with an unrelated business

  • Businesses use this type of integration to spread risk across more than one market

    • E.g. Online retailer Amazon's takeover of Whole Foods supermarket in 2017 is an example of conglomerate integration, as Amazon had no presence in the grocery market before this time