Presentation on theme: "Unit How do Businesses Grow?"— Presentation transcript:
1 Unit 2 2.2 How do Businesses Grow? Business ManagementUnit 22.2 How do Businesses Grow?
2 Unit 2.1 How do Business Grow? In this unit you will find out about:What is a successful productExpanding salesTakeovers/mergersDiversificationInnovationHorizontal and vertical integrationResearch and developmentReasons for growthEconomies and Diseconomies of Scale
3 How do we measure the size of a business? Number of EmployeesValue of Sales (Annual Turnover)Value of AssetsLevel of ProfitsValue of Shares
4 ProblemThere 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 manageWorkers are often given greater responsibility and so work harderSmall firms are flexibleIt works well as it is, eg customers know the business and brand loyalty has been establishedThe 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 beInternal – growth from within the organisationExternal – growth through outside influences eg mergers and takeovers.
7 INTERNAL GROWTH Product/service is successful Sales are good Profits are madeEven more sales as more is being producedMore premises, equipment boughtProfits are reinvestedMore profits are madeProfits are reinvested… and so on
8 Boy visits chicken farm and is given some eggs Chickens hatch and lay more eggsEggs sold and money used to buy more chickensand so onProfits used to build henhouses for more hensMore 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 businessTakeover (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 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
12 Diversification can be … Businesses merging with or taking over other businessesBusinesses going into the production of other products/services by themselves
15 Advantages of Diversification To spread the risks and avoid relying on sales of only one type of productEnsures survival of the company if one market collapsesAble to create a brand nameAble 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 integrationVertical integration – which can be either:Forwards vertical integrationBackwards 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 productsThey 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 IntegrationVertical Integration involves the joining together of firms at DIFFERENT STAGES of production.A frozen food company taking over a farm -BACKWARDS VERTICAL INTEGRATIONa frozen food company taking over a supermarket -FORWARD VERTICAL INTEGRATION.
21 What do you understand by “Innovation”? Innovation means developing new ideas and making discoveriesIt 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 technologydevelopment in their own marketchanging needs and wants of the marketTo 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 developmentTeacher 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 isto 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 145Match-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 145Match-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 competitivedysontoothpastetransitmobility aidsnowboardgooglefoodBurrs!
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.
28 The Product Life Cycle Explained A product will go through a variety of stages in its ‘life’ - after being launched on the marketIf 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-ledThis 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-ledThis 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 ScaleThese 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 businessINTERNAL ECONOMIESTechnical EconomiesManagerial EconomiesCommercial EconomiesMarketing EconomiesFinancial EconomiesRisk-bearing economiesEXTERNAL ECONOMIESDisintegrationLabourAncillary ServicesInfrastructure
34 Internal EconomiesTechnical 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 EconomiesDisintegration - 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 ScaleOver 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 diseconomiesPoor communicationLoss of efficiencyLoss of businessExternal diseconomiesCongestionPollutionDamage 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 etcDamage 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 growthWhat makes a successful product/serviceHow to expand salesReasons for mergers and takeoversAdvantages of mergers and takeoversWhat is diversificationWhat are the advantages of diversificationWhat is innovationWhat is horizontal integrationWhat is vertical integrationThe stages in product developmentWhat is the product life cycleThe difference between product-led and market-led businessesInternal economies of scale – technological, financial, managerial, marketingExternal economies of scale – infrastructure, effects on communityDiseconomies of scale