Why and How Businesses Grow (AQA A Level Business): Revision Note

Why do businesses grow?

• Business growth involves a business increasing its size, scope or scale

• Their leaders or owners may have ambitions for growth for a range of reasons

Organic growth

• Organic growth is growth driven by internal expansion using reinvested profits, owners' capital or loans

• Organic growth (internal) is usually generated by

  • Gaining greater market share

  • Product diversification

  • Opening a new store

  • International expansion

  • Investing in new technology/production machinery

• Firms will often grow organically to the point where they are in a financial position to integrate with others

  • Integration speeds up growth but also creates new challenges

Evaluating organic growth

External growth

• Integration in the form of mergers, takeovers, joint ventures or franchising results in rapid business growth and is referred to as external (or inorganic) growth

Methods of external growth

• A merger occurs when two or more companies combine to form a new company

  • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity

• A takeover occurs when one company purchases another company, often against its will

  • The acquiring company buys a controlling stake (more than 50% of shares) in the target company's shares and gains control of its operations 

• A joint venture occurs when two businesses join together to share their knowledge, resources and skills to form a separate business entity, usually for a limited period of time 

  • E.g. The mobile network EE is in a joint venture formed by the French mobile network, Orange and the German mobile network, T-Mobile

• Franchising is where a successful business lets other people open and run their own branches using its name, products and way of doing things

  • In return, franchisees pay an upfront fee and ongoing royalties, helping the original company grow quickly without having to invest all the money itself

• For a more detailed discussion of each of these methods, visit the revision note page Types of External Growth

Why pursue external growth?

Retrenchment

• Retrenchment is when a business deliberately reduces the size or scope of its operations

  • This could involve closing unprofitable branches, cutting staff, selling off assets or withdrawing from certain markets

  • The aim is to lower costs, improve cash flow and focus on its strongest, most profitable activities

Common reasons for retrenchment

1. Financial strain or losses

   • When profits fall or debts rise too high, companies close unprofitable sites or cut back to save cash

     • Thomas Cook shut many of its shops and flights before collapsing in 2019 due to mounting losses

2. Intense competition

   • If rivals undercut prices or offer better products, a firm may exit markets where it can’t compete

     • Nokia scaled down its mobile-phone business when Apple and Samsung took most of the market

3. Refocusing on core activities

   • To improve efficiency, businesses sell off or close side-lines and concentrate on their strongest operations

     • eBay sold PayPal so each company could focus on its own service - eBay on auctions and PayPal on digital payments