2.1.1.

Business Growth
Worksheet
 From Edexcel
Methods of business growth and their impact:
• Internal (organic) growth: new products (innovation, research and
development), new markets (through changing the marketing mix
or taking advantage of technology and/or expanding overseas)
• External (inorganic) growth: merger, takeover

The types of business ownership for growing businesses:

Public limited company (plc)

Sources of finance for growing and established businesses:

• Internal sources: retained profit, selling assets
• External sources: loan capital, share capital including stock market
flotation (public limited companies)
 Lesson objectives
To be able to identify methods of business
growth and their impact

To be able to discuss the types of business

ownership for growing businesses

To be able to identify sources of finance for

growing and established businesses
 Starter
• Can you arrange yourselves into height order
without speaking?
The impact of competition on business decision
Methods of business growth and their impact
making
Two main types of business growth
 Organic growth
• Organic growth means that the business has
grown from within
• The business has grown within itself without a
merger or takeover with another business
Organic Growth
• A business can grow by developing new
products, this is called new product
development
• New product ideas brought to market for
customers to buy are called innovations
• A business can put investment into R&D which
is research and development
Examples of new products in 2016
• Aftershokz Video here headphones that work
through bone conduction

£109.99
Examples of new products in 2016
Video

£20.65
 Organic growth – new
markets
• A business can grow from within by
entering new markets:
–This could be by expanding overseas
–This could be by changing the
marketing mix
–This could be by taking advantage of
technology
BBC video the challenge of
going global
• Visit Jerusalem and you’ll
find Topshop and Clarks
stores.
• When in Dubai, you can stop
by Fortnum & Mason and fill
up on a picnic hamper or
fine tea.
• Across many corners of the
world, British businesses are
making a mark on local
markets.
• Graze launched in
America in 2013

• Within 24 hours, Graze

had a customer in every
state; within three weeks
30,000 orders had been
placed and by three
months it had gained
100,000 customers.
• Website USA
Organic growth - new markets

• Cath Kidston – seller of

mugs, bags and clothing
has now moved into the
cycle and glasses
market
 Methods of growing organically: new
product launches
• A business can grow from
within by launching new
products
• Tesco Komodo Dragon
Chillies hit the shelves see
video here
• Reggae, Reggae crisps,
and drinks
• See here
 Organic growth
Advantages Disadvantages
 Advantages of organic growth
a) A business that grows from within can retain
their own company culture
b) Higher production means the business can
benefit from economies of scale and lower
average costs
c) More influence comes with more market
share, the business can start setting prices
for the industry
 Disadvantages of organic growth
a) This is a very high risk strategy, opening lots
of stores or taking on new staff is very risky
b) Long period between investment and return
on investment
c) Growth may be limited and is dependent on
reliability of sales forecasts
 Inorganic growth
• A business may decide to grow quicker and so it
will decide to merge or takeover another
business:

1. Merger – two businesses merge to become one

new one

2. Takeover – One business will takeover a another

business (by buying more than 50% of the
shares), sometimes this can be hostile if the
shareholders don’t agree
 Activity
• Have a look at the following examples and
think about why these businesses would come
together in such expensive deals…
 Google bought YouTube
06 Google purchased YouTube
had Hurley, 29, and Steve Chen,
, who set up YouTube in a
lifornia garage accepted £880
llion for the business
?
e two companies were "natural
rtners" to offer a media
tertainment service to users,
ntent owners and advertisers Video here from
Chad and Steve
 Microsoft bought LinkedIn
• 2016 Microsoft has bought the professional
networking site for £18.5 billion – watch the
video, Satya is the CEO of Microsoft…
 2014 Facebook bought WhatsApp
• Watch the animation:
 Inorganic growth - merging
Advantages Disadvantages
 Advantages of merging
a) Economies of scale. Better deals because of
increased order size, bulk-buying discounts etc
b) Increased revenue and market share. Increased
size of the combined company increases market
power and ability to set higher prices
c) Buying technology Sometimes it’s simply
impossible for a company to create the technology
it needs to sustain its growth. It can be a lot simpler
to just buy it
d) International Expansion. Buying a business in
another country helps with culture issues, foreign
laws etc
 Disadvantages of mergers
a) Clash of cultures All businesses have a slightly
different culture and they may not work well together
(see merger fails section)
b) Possible communication problems as the business
gets bigger, or if there are now too many employees
c) Unreliable merger partners A good merger will
depend on trust between the businesses
d) Diseconomies of scale As a business gats larger costs
will go up with problems of motivation,
communication and co-ordination
e) 80% of all mergers fail*
 Hostile takeover of NatWest bank by
Royal Bank of Scotland
• In the year 2000 NatWest gave in and allowed
a hostile takeover from RBS for £21 billion
• This made RBS the 2nd largest bank in the UK
and Europe (behind HSBC)
• RBS retained the brand but there were many
branch closures and 18,000 job losses
• This is the largest takeover in UK history
The
Theimpact
types of
of business
competition
ownership
on business
for growing
decision
businesses
making
 The types of business ownership for
growing businesses

• A growing business may

decide as it gets larger to
float shares on the stock
exchange to raise funds
• This will mean the
business will have to gain
plc status – public limited
company Video click picture
 A business could become a PLC
• Shares are open for anyone to buy
• Most shares in a plc are owned by
organisations rather than
individuals
• Shares bought and sold on the
Stock Exchanges
• The business can expand at any
time by selling more shares to raise
finance
• Limited liability which means the
business has its own legal status,
so the owners cannot be sued
 Becoming a plc
Advantages Disadvantages
 Advantages of becoming a plc:
• Limited Liability
• Easy to raise capital – issue
more shares
• Banks more willing to lend
money to a large well-
established company –
less risk
• Easier to grow and expand
 Disadvantages of becoming a plc:
• Expensive
• a lot administrative work (paper work)
• Raise at least £50,000
• Issue more information about itself
– expensive to produce
• Has to prepare Annual Accounts –
printed and sent to all shareholders
• Also make them available for
general public and competitors to
see, so they will know what your
plans are for the business
Sources
The impact
of finance
of competition
for growing
on business
and established
decision
businesses
making
 Two types of finance for growth
• Internal: this means the business
finds the money that it needs
itself, for example through selling
an asset or through using the
profits that it has

• External: this means that the

business will need to borrow the
money to expand somehow, this
includes loans, shares and even
floating on the stock market
 Retained profits
• After a year or more of • If a business is in its first
trading a business may year of trading it will NOT
have some profits that have any retained profits
they are able to re-invest – as it will not have made
into the business to help any to retain.
it grow. • The advantage is there is
• A well run business no interest to pay
should continually re- • The disadvantage is once
invest in new staff / it is used it has gone. This
equipment / stock/ is an internal source of
premises / vehicles etc finance
 Sale of assets
• A business can raise finance by selling
items that they already own.
• This could be:

 Machinery
 Land
 Premises
 Vehicles

The business that sells the asset will no

longer have the benefit of that asset and it
will not appear on the balance sheet of the
company – meaning the business will look
less attractive to investors
 Loans
• A business may ask a
bank for a loan if they
wish to expand

• The business will have to

pay back some of the loan
each month

• The business will also A Business bank loan

is about 7% but if the
have to pay interest to interest rates go up –
the bank on the loan the cost of the loan
may go up
 Share capital
• If a business is a Ltd – a
private limited company
then they can sell shares
to family and friends
• These shareholders will
then be entitled to share
of the profits of the
business
• There is no interest to pay
back so it can be cheaper
than a loan to issue
shares
• See this example business
here
 Floating on the stock market
• A ltd business may decide
it needs more money to
expand and will become a
public limited company
• This means it can “float”
the shares on the stock
market
• Shares in the business can
now be sold to the
general public, generating
more capital to expand
 Plenary
• Can you explain the main benefit of a business
using retained profit to expand rather than
any of the other methods of raising finance?
Sample question 1
 Answer question 1
• Answer is D sale of assets (such as a van or a
machine)
Sample question 2
Answer question 2
Sample question 3
Answer question 3
Written by Sarah Hilton ©

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