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Business · Growing the business

Business growth

Businesses grow in two ways: organically, from within, or externally, by merging with or taking over other businesses. Growth often means becoming a public limited company and finding new sources of finance.

  • 9 key terms
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From Topic 1

Answer from memory before the answers appear.

  • What is limited liability?

    The owners can only lose the money they invested in the business.

  • Who owns a private limited company?

    Shareholders, whose shares cannot be sold to the general public.

  • Name two long-term sources of finance.

    Any two of: personal savings, loans, share capital, venture capital, retained profit, crowdfunding.

  • What is market share?

    The percentage of total sales in a market made by one business.

Learning Objectives

  1. 1Explain organic growth through new products and new markets.
  2. 2Explain external growth through mergers and takeovers.
  3. 3Explain the features, advantages and disadvantages of a public limited company.
  4. 4Explain the internal and external sources of finance for a growing business.

Why Do Businesses Grow?

Most business owners want their business to get bigger.

  • More profit

    Selling more usually means more profit for the owners.

  • Economies of scale

    Bigger businesses can buy in bulk and spread their costs, so the cost of making each product falls.

  • Market share and power

    A larger business has more influence over prices and suppliers, and is harder for competitors to push out.

  • Survival

    A bigger business with several products or markets is less likely to fail if one of them struggles.

Organic (Internal) Growth

Organic growth is when a business grows by expanding its own activities.

  • New products

    Developing new products through innovation and research and development (R&D).

  • New markets: changing place

    Selling in new locations - opening new branches, selling online or selling abroad.

  • New markets: changing target market

    Selling existing products to new customers, such as a different age group.

  • The pace

    Organic growth is usually slow, but the business keeps control and grows at a speed it can manage.

Organic Growth: For and Against

Advantages

  • Lower risk: the business grows using what it already knows.
  • The owners keep control.
  • Can be paid for from retained profit, so less borrowing.
  • The business culture and quality stay the same.

Disadvantages

  • Slow: it can take years to grow significantly.
  • Competitors may grow faster by taking over other businesses.
  • Limited by how much profit the business makes.
  • New products and markets still carry risk.

Mergers and Takeovers

External (inorganic) growth is when a business grows by joining with another business.

  • Merger

    Two businesses agree to join together to form one new, larger business.

  • Takeover

    One business buys enough shares in another to gain control of it. A takeover can be friendly or hostile.

  • Why grow this way

    It is fast: the business instantly gains new customers, products, staff, skills and market share.

  • Removing competition

    Taking over a rival reduces competition in the market.

External Growth: For and Against

Advantages

  • Fast: growth happens almost overnight.
  • Instantly gains market share and customers.
  • Removes or reduces competition.
  • Gains new products, skills and technology.
  • Bigger economies of scale.

Disadvantages

  • Expensive: buying another business costs a lot.
  • The two businesses' cultures may clash.
  • Staff may lose their jobs, lowering morale.
  • Customers may dislike the change.
  • Harder to manage a much bigger business.

Public Limited Company (PLC)

A public limited company can sell its shares to the general public, usually on the stock market.

  • Stock market flotation

    When a company first sells its shares to the public on the stock market, it "floats".

  • Limited liability

    Like a private limited company, shareholders can only lose what they invested.

  • Advantages

    Can raise very large sums by selling shares; higher profile; easier to borrow from banks.

  • Disadvantages

    Expensive to set up; the original owners lose control, as anyone can buy shares; accounts are published in detail; risk of being taken over.

Private or Public Limited Company?

  • Shares sold to

    Private limited (Ltd): Chosen people, often family and friends. Public limited (PLC): The general public, on the stock market

  • Size of finance

    Private limited (Ltd): Limited to what owners and investors can put in. Public limited (PLC): Very large sums can be raised

  • Control

    Private limited (Ltd): Owners keep control. Public limited (PLC): Owners can lose control to new shareholders

  • Takeover risk

    Private limited (Ltd): Low. Public limited (PLC): Higher: anyone can buy shares

  • Liability

    Private limited (Ltd): Limited. Public limited (PLC): Limited

Sources of Finance for Growth

  • Retained profit (internal)

    Profit kept in the business. No interest or loss of control, but may not be enough for major growth.

  • Selling assets (internal)

    Selling property, machinery or vehicles the business no longer needs. Quick, but the assets are gone for good.

  • Loan capital (external)

    Large loans from banks, repaid with interest. Owners keep control, but interest adds to costs.

  • Share capital (external)

    Selling new shares, including a stock market flotation. Can raise huge sums, but owners share control and profit.

Case study

Dr. Martens: Floating on the Stock Market

Dr. Martens, the boot maker, began making its famous boots in Northamptonshire in 1960. As the brand grew worldwide, it became a public limited company, floating on the London Stock Exchange in January 2021. Selling shares to the public let its private owners sell part of their stake and made the business one of the best-known companies on the stock market - but it also meant its performance was now watched, and judged, by thousands of shareholders.

1960 The first Dr. Martens boots made in the UK
2021 Dr. Martens floats on the London Stock Exchange

Grow or Buy?

A successful chain of three gyms wants to double in size. Option A: open three new gyms over the next four years. Option B: take over a rival chain of three gyms now. For each option, give two advantages and two disadvantages, then recommend one.

1. Two advantages and two disadvantages of Option A.

2. Two advantages and two disadvantages of Option B.

3. Recommend one, and explain why.

A good answer shows: Two advantages and two disadvantages for organic and external growth, applied to gyms, with a justified recommendation.

Can I...?

  1. 1Explain why businesses grow.
  2. 2Explain organic growth through new products.
  3. 3Explain organic growth through new markets.
  4. 4Explain mergers and takeovers.
  5. 5Compare organic and external growth.
  6. 6Explain the features of a PLC.
  7. 7Explain internal sources of finance for growth.
  8. 8Explain external sources of finance for growth.

Summary & Exam Focus

  • Organic growth: new products (innovation, R&D) and new markets (new places or target markets).
  • External growth: mergers and takeovers - fast but expensive and risky.
  • A PLC can raise large sums by selling shares to the public, but the owners may lose control.
  • Growth can be financed internally (retained profit, selling assets) or externally (loans, share capital).

Exam focus

Explain one disadvantage to a business of growing through a takeover. (3 marks) (3 marks)

Use the business in the question - a takeover of a local rival means different risks from buying a supplier abroad.

Key terms

The vocabulary this lesson expects you to use. Each one is linked from the first place it appears above.

Organic growth
Growth from within, by expanding the business's own activities.
External growth
Growth by joining with another business, through a merger or takeover.
Merger
When two businesses agree to join together to form one business.
Takeover
When one business buys control of another.
Innovation
Turning new ideas into new products or processes.
Research and development (R&D)
Investigating and developing new products and processes.
Public limited company (PLC)
A company whose shares can be sold to the general public.
Stock market flotation
When a company first sells its shares to the public on the stock market.
Economies of scale
The fall in cost per unit as a business grows.

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