Over time, most businesses aim to grow. There are several options available to a business which wants to grow and each option has advantages and disadvantages.
Two main types of business growth – organic & inorganic
This is where the business grows within itself without a merger or takeover.
Advantages of organic growth: keep the company culture, benefit from economies of scale (cost savings as a result of size).
Disadvantages of organic growth: more stores means more staff so can be seen as risky, ROI not seen straight away.
Ways of doing this include:
- New Product Development – new products are launched. New ideas are called innovations and come about through investment in R & D (research and development)
- New Markets – a business might expand overseas – or it could change part of its marketing mix e.g. Ted Baker changed its ‘product’ when it moved into cosmetics and toiletries
Now try this exam question:
“Explain one advantage of expanding by internal (organic) growth” (3)
If you need help, click here for a mark scheme.
This is a quicker way of growing. There are two ways of doing it:
Merger – two businesses decide to merge together to become one
You’ll need to know some advantages and disadvantages of merging:
Advantages – economies of scale, increased market share, access to technology
Disadvantages – culture clash, communication problems, high probability of failure
Takeover – one business takes over another by acquiring more than 50% of shares
When one business takes over another, it can do it through either horizontal or vertical integration.
Horizontal – the business acquires another business in the same industry to reduce competition, access new markets and benefit from economies of scale.
Vertical– the business acquires another business either before (backward) or after it (forward) in the supply chain to strengthen the supply chain, reduce production costs or access new markets.
As a business grows it might become a PLC and float (issue shares) on the stock exchange. This can help raise finance for the growth. Make sure you remember the advantages and disadvantages of becoming a PLC.