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Business Management


Business Management Unit 2 2.2 How do Businesses Grow? Unit 2.1 How do Business Grow? In this unit you will find out about: What is a successful product Expanding ... – PowerPoint PPT presentation

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Title: Business Management

Business Management
  • Unit 2
  • 2.2 How do Businesses Grow?

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

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

  • 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 BTs value of sales is only about
    one third of BPs - yet everyone would agree that
    they are both large firms.

Why might a successful business decide to remain
  • 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

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
Sales are good
Profits are made
Product/service is successful
More premises, equipment bought
Profits are reinvested
Even more sales as more is being produced
More profits are made
Profits are reinvested
and so on
Boy visits chicken farm and is given some eggs
Chickens hatch and lay more eggs
Eggs sold and money used to buy more chickens
More eggs increasing profits
Profits used to build henhouses for more hens
and so on
  • There are 2 ways a business may grow externally
  • Merger when 2 or more businesses agree to join
    together to create one businesshttp//
  • Takeover (acquisition) one business buys
    another. Usually the one making the takeover is
    the larger one http//

  • 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.

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

Diversification can be
  • Businesses merging with or taking over other
  • Businesses going into the production of other
    products/services by themselves
  • http//
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  • http//
  • video

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
  • Able to create a brand name
  • Able to increase its market share

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

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)

Vertical Integration
  • Vertical Integration involves the joining
    together of firms at DIFFERENT STAGES of
  • A frozen food company taking over a farm
  • a frozen food company taking over a supermarket

Backward Vertical Integration
Horizontal Integration
Frozen Food Company
Frozen Food Company
Frozen Food Company
Forward Vertical Integration
  • Starbucks
  • Coop
  • Porsche
  • Orange

What do you understand by Innovation?
Innovation means developing new ideas and making
discoveries It can also involve creating new
solutions for old problems
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
  • Billions are spent each year on product

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.

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?

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

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
    products 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
  • LIFT-OFF! - where the product is finally
    launched, some alterations already having been
    made as a result of Stage 4.

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 firms 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.

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

  • 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

Click here for Case Study
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

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
  • Technical Economies
  • Managerial Economies
  • Commercial Economies
  • Marketing Economies
  • Financial Economies
  • Risk-bearing economies
  • Disintegration
  • Labour
  • Ancillary Services
  • Infrastructure

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
  • 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.

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

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
  • 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.

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

  • 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
  • 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

  • External Diseconomies
  • These are disadvantages that occur when too many
    firms in an industry are crowded into the same
  • 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

  • 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
  • Internal economies of scale technological,
    financial, managerial, marketing
  • External economies of scale infrastructure,
    effects on community
  • Diseconomies of scale