1. Unit 2 2.2 How do Businesses Grow?
Business Management
Unit 2
2.2 How do Businesses Grow?

2. 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

3. 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

4. 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.

5. 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

6. 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.

7. INTERNAL GROWTH Product/service is successful Sales are good
Profits are made
Even more sales as more is being produced
More premises, equipment bought
Profits are reinvested
More profits are made
Profits are reinvested
… and so on

8. Boy visits chicken farm and is given some eggs
Chickens hatch and lay more eggs
Eggs sold and money used to buy more chickens
and so on
Profits used to build henhouses for more hens
More eggs increasing profits

9. EXTERNAL GROWTH There are 2 ways a business may grow externally
Merger – when 2 or more businesses agree to join together to create one business
Takeover (acquisition) – one business buys another. Usually the one making the takeover is the larger one

10. 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.

11. Reasons for Growth 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
cost savings from being larger - economies of scale

12. Diversification can be …
Businesses merging with or taking over other businesses
Businesses going into the production of other products/services by themselves

14. Mackies
video

15. 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

16. Horizontal integration Vertical integration – which can be either:
Integration Options …
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

17. 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)

18. 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.

19. Backward Vertical Integration
Farm
Backward Vertical Integration
Horizontal Integration
Frozen Food
Company
Frozen Food
Company
Frozen Food
Company
Forward Vertical Integration
Supermarket

20. Starbucks
Coop
Porsche
Orange

21. What do you understand by “Innovation”?
Innovation means developing new ideas and making discoveries
It can also involve creating new solutions for old problems

22. 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 technology
development in their own market
changing 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
Teacher Note:
Have pupils look up the meaning of Innovation using Wikipedia or tools in Word. Can make up the meaning in their own words. Might want to do a table in Word of key terms as you go through this unit. Could link this to a mind map they create at the end of the unit.

23. Research and Development
This needs to be carried out if an enterprise is
to grow in size or remain competitive.
Product Development developing new products or improving existing ones.
Tasks:
Business Studies For You:
The BallPoint Pen C/Study – pg 145
Match-it – pg 146

24. 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?
Tasks:
Business Studies For You:
The BallPoint Pen C/Study – pg 145
Match-it – pg 146

25. Have a look at these videos of product development …
Note – some of these products are completely new, others are changing/improving to remain competitive
dyson
toothpaste
transit
mobility aid
snowboard
google
food
Burrs!

26. 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.

27. PRODUCT LIFE CYCLE

28. 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.

29. Product-led or Market-led
Many 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

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

31. Click here for Case Study
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

32. 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).

33. 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

34. 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.

35. 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

36. 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.

37. 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

38. 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.

39. 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

40. 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