1. SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 © Business Education Network (BEN) 2008/2009 TN Business Growth How does a business get bigger?

2. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 F Continued… Should a Business try to Grow This is a decision that many owners (or managers on behalf of owners) have to make. Will growth in business increase sales and profits? Would income from more sales cover additional costs? eg machinery, employees, bigger premises.

3. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Should a Business try to Grow? F Will the business’s market share allow it to compete with competitors successfully? Should it stay the way it is as it seems to work well? eg customers know the business and brand, loyalty has been established

4. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Product Led Growth F This occurs when a business believes that consumers will want to buy its product or service without confirming this through research.

5. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Market Led Growth F WS Clickto access worksheet This type of growth occurs when a business comes up with an idea that it believes will sell well (enterprising) then carries out research to make sure. A prototype of the product is built and test marketed. If tests confirm that the product will sell well, it is launched and goes through the stages of the product life-cycle (Unit 2-1).

6. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Maximising Revenue F Continued… How do businesses try to maximise sales of its products or services? Market research – to confirm that there is a need for the product/service. Advertising, promotions and publicity Word-of-mouth

7. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Maximising Revenue F Successful products/services Sell well. Have a good reputation Receive successful reviews Obtain celebrity endorsements

8. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Reasons for Growth F To maximise profits To gain control of the market – increasing market share, taking over competitors To control the supply of raw materials, eg farmers supplying Tesco To diversify – having more than one product, eg Virgin, RBS To benefit from economies of scale

9. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Methods of Expansion F PN 1. Internal Expansion This occurs when a business can grow within itself (ie internally).

10. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Methods of Expansion Merger When 2 businesses agree to become one, normally offering similar products and services. Takeover When one business buys another, eg Morrisons and Safeway. F 2. External Expansion This is where the business uses outside influences to help it grow such as:

11. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 About Business Growth G Market Share Morrisons and Safeway - an example Morrisons had successfully grown through internal expansion and was ready to try to increase its market share. It achieved this through a take-over. The supermarket that it purchased was Safeway. This allowed Morrisons to increase its market share even further. Its market share increased through external expansion. Market share is the term used to describe how much of a market that a business controls (eg 20% of all the sales are for its product). Morrisons had a larger market share than Safeway. PN

12. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Why Innovation is so important To succeed all businesses must attempt to be ahead of its competitors. All businesses must be aware of: To do this they need to invest time and resources in order to come up with new ideas (ie to be innovative). developments in technology development in their own market changing needs and wants of the market G

13. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Diversification (spreading the risk) G Definition: Advantages: By diversifying a business does not depend on one type of product for its success or profits. It will have more than one product type. Not keeping all its eggs in one basket! Spreading the risk of failure. Able to implement change more easily into the business. Able to create a brand name. Able to increase its market share. PN

14. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 External Integration A Merger occurs when 2 businesses agree to join together to become one. A Take-over occurs when one business buys another business (whether it wants to be bought or not. G Both Mergers and Take-overs are examples of integration.

15. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Integration Options G A business can grow using 2 different types of integration, these are: Horizontal integration Vertical integration – which can be either: Forwards vertical integration Backwards vertical integration

16. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Horizontal Integration G This method of growth can be achieved by internal and external expansion (takeover, merger). The businesses involved will be producing the same or similar products. They will also be at the same stage in the production chain (eg one farmer might take- over another farmer).

17. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 G Advantages of Horizontal Integration: Economies of scale by selling more products it becomes possible to open more outlets in different places buying raw in bulk is cheaper Increased market share Established a brand name and identity, eg Virgin Vie, Virgin Credit Card, Virgin mobile Horizontal Integration

18. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Vertical Integration G This is where businesses that are involved at different stages in the production chain join together. This type of growth can be either: forwards vertical integration backwards vertical integration

19. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 G Vertical Integration Forward Backward This is where a successful business takes over a business that is at a later stage of production eg a steel manufacturer takes over a car manufacturer. This is where a successful business takes over a supplier, involved at an earlier stage in production eg a car manufacturer takes over a company that makes car tyres.

20. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Economies of Scale Economies of Scale are benefits that a business gains from being bigger. For example, James Dyson thought he could produce a better vacuum cleaner than was already on the market. He has and continues to make these even better. He has made his company larger over the years and it is now a limited company (Ltd). Continued… WWW Reasons for Growth

21. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Economies of Scale Economies of Scale can occur by either: Reasons for Growth Internal Economies of Scale External Economies of Scale These are from within the business These are from outside the business

22. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 Internal Economies of Scale C Internal Economies of Scale can occur for the following 4 reasons. 1.Technical Economies 2.Financial Economies 3.Managerial Economies 4.Marketing Economies

23. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Internal Economies of Scale 1.Technical Economies As organisations grow this can result in greater profits being made. Some of this profit can be invest in obtaining better machinery (eg quicker; less waste) or more automation (eg robots working 24 hour a day). This helps the organisation to produce more output and/or produce output more cheaply and/or to a higher standard of quality.

24. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Internal Economies of Scale As organisations grow they tend to generate more income and higher profits. They also tend to use some of this income to buy assets eg premises, machinery, vehicles. This in turn makes them a better risk with financial organisations (eg a bank) and this can help them borrow money at a lower interest rate. 2.Financial Economies

25. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Internal Economies of Scale As organisations grow they have more money at their disposal and are more likely to be able to recruit specialist staff (eg in Finance, HRM, Marketing, Operations). Specialist staff with greater knowledge, understanding and experience are more likely to make better decisions. The more specialist staff the more likely it is for an organisation to succeed. 3.Managerial Economies

26. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Internal Economies of Scale As organisations grow they can afford to spend more of their income on advertising and other promotional activities. Growth increases production which means that effective marketing can result in even higher sales. 4.Marketing Economies

27. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C External Economies of Scale Organisations can also obtain Economies of Scale due to their location. Infrastructure The term Infrastructure refers to the capital assets which are available for use within a locality eg roads; airports; railway stations; schools and colleges, hospitals etc. The better the infrastructure the more likely it will be for organisations to want to locate there. A new store, for example, will create employment in the area and the Council will want to improve the road network so the local community can use the store.

28. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C External Economies of Scale Effects for the wider community With more people in employment, consumers will have more money to spend in other shops in the area. Increased income for the Council (through taxation) may allow it to improve the bus services into and out of towns. Better transport services will enable more consumers to visit the area. More workers may move to the area to find work. More Council income may be spent on improving roads and/or housing. Organisations within the area have better roads, transport links, educational centres etc.

29. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Effects of being too Big! Downsizing When an organisation experience financial problems, it has to consider reducing its workforce ie Downsizing. De-layering When communication within an organisation is a problem it may consider De-layering. De- layering involves reducing the number of different levels of management and increasing manager’s span of control. This should help employees to be more involved in decision making and communication should be improved. Continued…

30. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Effects of being too Big! Outsourcing Outsourcing occurs when an organisation chooses to get another company to provide services that its own workers used to provide. eg reprographics, marketing. This saves the business having to deal with staffing issues.

31. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Diseconomies of Scale Unfortunately when an organisation grows this does not guarantee that it will achieve any economies. Indeed the reverse may be true. Diseconomies of Scale can result from; Poor communications eg due to too many levels between workers and senior management (losing touch). Bad publicity if industrial action is being made. Continued…

32. © Business Education Network (BEN) 2008/2009 SG Business Management Area of Study 2.2 – How do Businesses Grow? B190/089 C Diseconomies of Scale Exploitation of labour abroad - unfair treatment or use of people to make profits for business organisation, ie GAP. This creates the possibility of boycotting these stores as public opinion is one of shock and to withdrawn their custom. Inefficiencies/carelessness due to poor communication and/or workers feeling undervalued due to the size of the organisation. Diseconomies result in costs rising rather than falling.