A business grows when it sells more goods and services in one time period than a previous period. Growth enables a business to:
• Increase profits
• Increase market share (having more control in a market may force rivals out of business)
• Take advantage of economies of scale (larger businesses can achieve lower average costs)
Internal growth - A business increases in size by selling more goods/services
How?
• Changing the marketing mix
• New product development
External growth - A business grows in size due to merger or takeover
• Horizontal integration - Acquisition takes place between two businesses at the same stage of the production process
• Backward vertical integration - Two businesses at different stages of the chain of production joining together (e.g. Body Shop buying the farms which produced the natural ingredients for their products)
• Forward vertical integration - A business joins with another which is further forward in the chain of production
• Conglomerate merger - Two businesses join together which have no common business interest
Disadvantages of external growth:
• Job losses
o Costs are saved by closing facilities which are duplicated (e.g. Head Offices)
• Combined business may lead to the loss of identity for individual businesses.
Why do businesses grow?
Why?
• Survival
• Larger returns for owners
• Economies of Scale
• Spreading the risk
Bulk-buying economies - When businesses can gain discounts on large orders from suppliers
Technical economies of scale - Reduction of average cost of production due to the use of more advanced machinery
Market power - A measure of the influence of a business over consumers and suppliers. Linked with market share. If you’re in a monopoly, you can increase prices knowing customers wouldn’t shift as there isn’t an alternative. Can also pay less to small suppliers, as the small suppliers need them.
Diseconomies of scale include:
• Communication within the business can become more problematic
• Workers may feel alienated feeling that they are only a small cog in a large wheel
• Large firms may lose their ability to adapt quickly to changes in the market
ICT is helping to avoid some of the communication issues.
Monopoly
Monopoly - A business which has a market share of 25% and therefore can influence the market
It is good for the business as they have market power and therefore their sales and profits are likely to be higher than if there was competition. It is bad for consumers as they may have to pay more
Disadvantages of a monopoly:
• High prices
• Less choice
• Excessive profits made by the business
Advantages of monopoly:
• Potentially cheaper prices if larger businesses negotiate lower prices for their raw materials and components (bulk buying economies of scale)
• Development of new products (more money for patents)
• Natural monopolies- One large business can supply the market with products at lower costs than if the market was supplied by many producers
• Better having one set of pipes for a water supply service than many different companies putting their pipes down
Can a big business be controlled?
The Competition Commission investigates mergers, markets and regulated industries. They can block mergers, force companies to sell off assets and make changes to the way markets operate. Any monopoly is subject to investigation by them.
Regulators are independent bodies set up by the government to monitor and regulate business activity. Each industry is assigned a regulator (e.g. Office of Rail Regulation). Only really interested in monopolies.
Regulator monitors:
• Prices
• Quality of service provided
• Seeing that the business is acting in public interest
A business can self-regulate where an industry body made up of representatives from businesses within the industry monitor the actions of members to ensure rules and guidelines are followed.
Pressure group: An organisation which aims to influence the decision of businesses, government and individuals.
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