Business Management Unit 2 2.2 How do Businesses Grow?

Business Management

Unit 22.2 How do Businesses Grow?

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Unit 2.1 How do Business Grow?

In this unit you will find out about:

What is a successful product Expanding sales Takeovers/mergers Diversification Innovation Horizontal and vertical integration Research and development Reasons for growth Economies and Diseconomies of Scale

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How do we measure the size of a business?

Number of Employees Value of Sales (Annual Turnover) Value of Assets Level of Profits Value of Shares

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Problem

There are real problems trying to compare one firm with another, particularly firms in different industries.

For example:• BT has almost twice as many workers as British

Petroleum, but BT’s value of sales is only about one third of BP’s - yet everyone would agree that they are both large firms.

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Why might a successful business decide to remain small?

It is easier to manage Workers are often given greater responsibility

and so work harder Small firms are flexible It works well as it is, eg customers know the

business and brand loyalty has been established The community benefits, because small firms are

often labour-intensive (they use relatively more workers than they do machinery and land) compared to larger firms

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Many successful businesses will grow

A successful product or service can lead to expansion. The expansion can be

Internal – growth from within the organisation

External – growth through outside influences eg mergers and takeovers.

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INTERNAL GROWTH

More premises, equipment

bought

Sales are goodProfits are

made

Profits are reinvested

Product/service is successful

Even more sales as more

is being produced

More profits are made

Profits are reinvested

… and so on

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Boy visits chicken farm and is given

some eggs

Chickens hatch and lay more

eggs

Eggs sold and money used to

buy more chickens

More eggs increasing profits

Profits used to build henhouses for more hens

and so on

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EXTERNAL GROWTH

There are 2 ways a business may grow externally

o Merger – when 2 or more businesses agree to join together to create one business

http://www.bbc.co.uk/news/business-11861141

o Takeover (acquisition) – one business buys another. Usually the one making the takeover is the larger one http://news.bbc.co.uk/1/hi/business/8468096.stm

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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.

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Reasons for Growth

To maximise profitsTo gain control of the market – increasing

market share, taking over competitorsTo control the supply of raw materials, eg

farmers supplying TescoTo diversify – having more than one

product, eg Virgin, RBScost savings from being larger -

economies of scale

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Diversification can be …

Businesses merging with or taking over other businesses

Businesses going into the production of other products/services by themselves

http://www.bbc.co.uk/learningzone/clips/diversification-of-farms/6135.html http://www.bbc.co.uk/learningzone/clips/diversification-of-forestry-tweed-valley-forest

-park/6136.html http://www.bbc.co.uk/learningzone/clips/loch-lomond-land-use-farming/1141.html

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Fitness

Music

FinancialServices

Travel

Transport

Phones

Virgin

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Mackies

http://www.mackies.co.uk/

video

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Advantages of Diversification

To spread the risks and avoid relying on sales of only one type of product

Ensures survival of the company if one market collapses

Able to create a brand name Able to increase its market share

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Integration Options …

A business can grow using 2 different types of integration, these are:Horizontal integrationVertical integration – which can be

either:Forwards vertical integrationBackwards vertical integration

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Horizontal Integration

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)

Example: A frozen food company (Birds Eye) merging with another frozen food company (Findus)

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Vertical Integration

Vertical Integration involves the joining together of firms at DIFFERENT STAGES of production.

A frozen food company taking over a farm -BACKWARDS VERTICAL INTEGRATION

a frozen food company taking over a supermarket -FORWARD VERTICAL INTEGRATION.

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Frozen Food

Company

Frozen Food

Company

Frozen Food

Company

Farm

Supermarket

Backward Vertical

Integration

Horizontal Integration

Forward Vertical Integration

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Starbucks

Coop

Porsche

Orange

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What do you understand by “Innovation”?

Innovation means developing new ideas and making discoveries

It can also involve creating new solutions for old problems

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Why Innovation is so important

To succeed, all businesses must attempt to be ahead of their competitors.All businesses must be aware of:

developments in technologydevelopment in their own marketchanging needs and wants of the market

To do this they need to invest time and resources in order to come up with new ideas (ie to be innovative).

Billions are spent each year on product development

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Research and Development

This needs to be carried out if an enterprise isto grow in size or remain competitive.

Product Development developing new products or improving existing ones.

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Research and Development

Market research – needs to be carried out to see if the new product or improved product is viable.

Is there a market for the product?

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Have a look at these videos of product development …

dyson toothpaste transit mobility aid snowboard google food Burrs!

Note – some of these products are completely new, others are

changing/improving to remain competitive

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Stages in Product Development and Research

IDEAS are developed, either from extensive scientific research, from identifying a market through market research or through ‘brainstorming’ sessions.

ANALYSIS stage - there may be more market research carried out, technical problems solved, costs estimated and checks undertaken on a product’s safety, legality etc.

PROTOTYPE or DEVELOPMENT stage - lab experiments or production of a model may be necessary, designs have to be shaped and altered and perhaps even some preliminary testing undertaken.

TEST MARKETING where the product is tested on a representative sample of consumers. This results in useful feedback and hopefully reduces the risks of failure when the product is finally launched.

LIFT-OFF! - where the product is finally launched, some alterations already having been made as a result of Stage 4.

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PRODUCT LIFE CYCLE

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The Product Life Cycle Explained

A product will go through a variety of stages in its ‘life’ - after being launched on the market

If the product is successful, there may be a rapid growth of sales.

Competitors may then start to produce a version of their own and the original firm’s sales will begin to level off.

Later, if too many firms are attracted into the market, some may be unable to survive and be forced to leave.

As sales of a product start to decline, firms (if they have continued with the Research and Development process) will start to launch new products, which then go through the same stages.

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Product-led or Market-ledMany organisations are described as product orientated. This means they develop a product and then look for a market to sell to.

Others are market orientated. This means that the whole organisation focuses on the needs of its consumers. It is therefore essential that it identifies and anticipates changing consumer needs before the

development of new products

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Product-led

This occurs when a business believes that consumers will want to buy its product or service without confirming this through research.

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Market-led

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.

Click here for Case Study

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What are Economies of Scale

Advantages of large firms compared to small firms producing similar goods or services are often known as internal economies (advantages) of scale (size).

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Economies of Scale

These are the benefits a business gains as it grows. Internal economies of scale come from within the business; external economies come from or affect the world outside the business

INTERNAL ECONOMIES

Technical Economies

Managerial Economies

Commercial Economies

Marketing Economies

Financial Economies

Risk-bearing economies

EXTERNAL ECONOMIES

Disintegration

Labour

Ancillary Services

Infrastructure

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Internal Economies

•Technical Economies - Large businesses can afford automation, computerisation and technology. These often produce greater quantities of goods in a given time. As a result, the cost per unit is reduced. Small firms are often unable to do this.

•Labour and Managerial Economies - In a small firm the owner or manager may have to do everything but in a large firm they can afford specialist managers, eg sales and human resources.

•Commercial Economies - Large firms can often get discounts for buying in bulk. They can do this because they perhaps have more storage space.

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Internal Economies (cont)

•Marketing Economies - Small firms find advertising very expensive, but large firms can afford effective advertising, since the cost can be spread over a much larger level of output.

•Financial Economies - Large business can obtain funding in the form of loans, overdrafts and credit at lower rates than smaller companies.

•Risk-bearing Economies - Large businesses are able to sell over a wider market or offer a wider range of products because if demand for one product falls they can often make up the lost sales through the sales of another

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External Economies

•Disintegration - Other firms are attracted to areas where specialised industries already exist - eg firms producing components or offering help with maintenance and processes.

•Labour - There will be many specialist workers already trained. This will mean training costs will be reduced. Also colleges may offer courses that are aimed at meeting the needs of local industry.

•Ancillary services - these are supporting services. All firms benefit from local specialised businesses. Eg - shipbuilding on the Clyde, local businesses like engineering works, sail-makers etc will all benefit.

•Infrastructure - a Local Authority can feel encouraged to spend money on local roads and other facilities if it knows a large company will set up in its area. This is beneficial to the company and the local community.

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Diseconomies Of Scale

Over longer periods of time there are disadvantages of growing bigger and these tend to push the cost per unit up again.

These are known as Diseconomies of Scale and can be Internal or External.

Internal diseconomies

Poor communication

Loss of efficiency

Loss of business

External diseconomies

Congestion

Pollution

Damage to the environment

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Internal Diseconomies

These are disadvantages that occur within a firm due to that firm itself becoming large.

• Poor communication between managers and employees can result in delays and misunderstandings that lead to industrial disputes.

• Loss of efficiency as it becomes more difficult to keep control of quality of work.

• Loss of business as customers become frustrated with delays and communication problems.

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External Diseconomies

These are disadvantages that occur when too many firms in an industry are crowded into the same area.

• Congestion - all facilities including rail, air, sea and road transport become overcrowded causing delays.

• Pollution caused by vehicles, factory waste, overcrowded housing etc

• Damage to the environment eg, cutting down trees etc in order to build factories, roads etc

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TO SUM UP, DO YOU KNOW … Why might businesses

remain small Internal and external

growth What makes a successful

product/service How to expand sales Reasons for mergers and

takeovers Advantages of mergers

and takeovers What is diversification What are the advantages

of diversification What is innovation What is horizontal

integration

What is vertical integration The stages in product

development What is the product life

cycle The difference between

product-led and market-led businesses

Internal economies of scale – technological, financial, managerial, marketing

External economies of scale – infrastructure, effects on community

Diseconomies of scale