advantages and disadvantages of methods of growth

1 Understanding Business Activity

1.1 Purpose of Business Activity

• Needs vs. wants – Needs are essential (food, shelter); wants are desires beyond basic needs.
• Sectors of the economy
  • Primary – extraction of raw materials (e.g., farming, mining).
  • Secondary – manufacturing and construction (e.g., car production).
  • Tertiary – services (e.g., retail, banking).
• Classification of businesses
  • By size – micro, small, medium, large (based on turnover, employees, assets).
  • By ownership – private, public, state‑owned, co‑operative.
  • By market – local, national, multinational.

1.2 Enterprise

• Definition – The process of identifying opportunities, organising resources and taking risks to create a business.
• Characteristics of an entrepreneur – Innovation, risk‑taking, vision, perseverance.
• Types of enterprise
  • Sole trader
  • Partnership
  • Limited company (private & public)
  • Co‑operative
  • Franchise

1.3 Business Objectives

• Survival, profit maximisation, growth, market‑share increase, quality, social‑enterprise aims, corporate social responsibility.
• Objectives should be SMART – Specific, Measurable, Achievable, Realistic, Time‑bound.

1.4 Stakeholders and Their Objectives

Stakeholder	Typical Objectives
Owners / shareholders	Profit, return on investment, growth.
Managers	Achieve targets, career progression, efficient operation.
Employees	Job security, fair wages, good working conditions.
Customers	Value for money, quality, service.
Suppliers	Steady orders, timely payment.
Community / government	Employment, tax revenue, environmental protection.

1.5 Business Failure

• Common causes – inadequate finance, poor planning, weak market research, bad location, ineffective management.
• Prevention – realistic business plan, cash‑flow forecasting, regular performance review, contingency planning.

1.6 Measuring Business Size

• Turnover (sales revenue)
• Number of employees (full‑time equivalents)
• Market share (percentage of industry sales)
• Value of physical assets (plant, equipment, premises)
• Geographic reach (outlets, countries)
• Profitability ratios (gross profit margin, ROCE)

2 People in Business

2.1 Motivation Theories

Theory	Key Idea	Application
Maslow’s hierarchy of needs	Physiological → Safety → Social → Esteem → Self‑actualisation	Design pay, security, team‑building, recognition programmes.
Herzberg’s two‑factor theory	Hygiene factors (salary, conditions) prevent dissatisfaction; motivators (achievement, responsibility) create satisfaction.	Improve working conditions and give meaningful tasks.
McGregor’s Theory X & Y	X = people dislike work; Y = people seek responsibility.	Adopt a Theory Y style to encourage autonomy.

2.2 Management Functions

1. Planning – setting objectives, deciding actions.
2. Organising – allocating resources, establishing structure.
3. Leading – motivating, communicating, directing.
4. Controlling – monitoring performance, taking corrective action.

2.3 Leadership Styles

• Autocratic – decisions made by manager alone.
• Democratic – staff consulted, decision shared.
• Laissez‑faire – little direction, staff operate independently.

2.4 Trade Unions & Collective Bargaining

• Purpose – protect members’ pay, conditions, rights.
• Process – negotiate with employer, may lead to strikes if agreement not reached.

2.5 Recruitment, Selection & Training

1. Recruitment – advertising, internal promotion, recruitment agencies.
2. Selection – shortlisting, interviews, tests, reference checks.
3. Training – on‑the‑job (coaching, job‑rotation) and off‑the‑job (classroom, e‑learning).

2.6 Redundancy & Alternatives

• Redundancy occurs when work is no longer needed – legal process includes consultation, notice, severance.
• Alternatives – reduced hours, job‑sharing, voluntary early retirement, redeployment.

2.7 Legal Controls & Health & Safety

• Employment law – contracts, minimum wage, working time regulations.
• Health & safety – risk assessments, training, provision of protective equipment.

2.8 Communication

• Formal (reports, memos) vs. informal (chat, social media).
• Channels – written, oral, digital.
• Barriers – language, noise, cultural differences – overcome by clear, concise messages and feedback loops.

3 Marketing

3.1 Role of Marketing

Identifies customer needs, creates value, builds relationships, and generates sales.

3.2 Market Changes

• Technological – e‑commerce, mobile apps.
• Social – changing lifestyles, ageing population.
• Economic – recession, inflation, disposable income.

3.3 Niche vs. Mass Markets

• Niche – specialised, small segment (e.g., vegan cosmetics).
• Mass – broad appeal (e.g., soft drinks).

3.4 Market Segmentation

Basis	Example
Demographic	Age, gender, income.
Geographic	Region, climate.
Psychographic	Lifestyle, personality.
Behavioural	Occasion, loyalty.

3.5 Market Research

• Primary research – surveys, interviews, focus groups.
• Secondary research – published reports, statistics.

3.6 The 4 Ps

P	Key Considerations
Product	Features, quality, branding, life‑cycle.
Price	Cost‑plus, competition‑based, demand‑based, psychological pricing.
Place (Distribution)	Direct vs. indirect channels, logistics, location.
Promotion	Advertising, sales promotion, public relations, personal selling, digital marketing.

3.7 Product Life‑Cycle (PLC)

1. Introduction – low sales, high costs, focus on awareness.
2. Growth – rising sales, economies of scale, competition appears.
3. Maturity – peak sales, price competition, need for differentiation.
4. Decline – falling sales, consider harvesting or divestment.

3.8 Pricing Strategies

• Cost‑plus (markup)
• Competitive (match rivals)
• Penetration (low price to gain market share)
• Skimming (high price for early adopters)
• Psychological (e.g., £9.99)

3.9 Distribution Strategies

• Intensive – many outlets (e.g., soft drinks).
• Selective – limited outlets for brand control (e.g., high‑end electronics).
• Exclusive – single retailer per region (e.g., luxury cars).

3.10 Promotion Mix

• Advertising – paid, mass media.
• Sales promotion – coupons, discounts.
• Public relations – press releases, events.
• Personal selling – face‑to‑face interaction.
• Direct & digital marketing – email, social media.

3.11 E‑commerce

• Advantages – wider reach, lower overheads, 24/7 sales.
• Disadvantages – security concerns, delivery logistics, lack of personal contact.

3.12 Legal & Ethical Issues

• Consumer protection – returns, warranties.
• Advertising standards – truthfulness, no misleading claims.
• Data protection – GDPR compliance.

3.13 Foreign‑Market Entry Strategies

Method	Key Features	Typical Advantages	Typical Disadvantages
Exporting	Sell domestically produced goods abroad.	Low investment.	Transport costs, trade barriers.
Licensing	Grant rights to another firm to use IP.	Fast entry, low risk.	Limited control, possible imitation.
Franchising	Grant brand & system to franchisee.	Rapid expansion, local knowledge.	Quality control issues.
Joint venture	Partner with a local firm.	Shared risk, local expertise.	Profit sharing, possible conflict.
Wholly‑owned subsidiary	Set up own operation abroad.	Full control, profit retention.	High capital requirement, cultural risk.

4 Operations Management

4.1 Production Methods

Method	Typical Use	Key Advantages	Key Disadvantages
Job production	Custom items (e.g., bespoke furniture)	High flexibility.	High unit cost.
Batch production	Seasonal fashion, bakery items	Balanced cost & flexibility.	Set‑up time between batches.
Flow (mass) production	Cars, electronics	Low unit cost, high volume.	Low flexibility.
Lean production	Toyota Production System	Reduced waste, higher efficiency.	Requires strong culture and training.

4.2 Location Decisions

• Factors – proximity to market, raw materials, transport links, labour availability, government incentives, competition.
• Tools – location‑factor rating, break‑even analysis for different sites.

4.3 Quality Management

• Quality control (QC) – inspection of output, testing.
• Quality assurance (QA) – processes to prevent defects (e.g., ISO 9001).
• Total Quality Management (TQM) – organisation‑wide focus on continuous improvement.

4.4 Innovation

• Product innovation – new or significantly improved goods.
• Process innovation – new ways of producing or delivering (e.g., automation).

4.5 Capacity Utilisation & Economies of Scale

• Higher utilisation reduces average cost per unit.
• Economies of scale – cost advantages when output increases (spreading fixed costs, bulk buying).
• Diseconomies of scale – coordination problems, bureaucracy when too large.

4.6 Break‑Even Analysis

Break‑even point (units) = Fixed Costs ÷ (Selling price per unit – Variable cost per unit). Useful for pricing, planning new product launches, and assessing the impact of cost changes.

5 Financial Information and Decisions

5.1 Sources of Finance

Source	Type	Advantages	Disadvantages
Retained profits	Internal	No interest, retains control.	Limited to existing profits.
Bank loan	External debt	Fixed repayment schedule.	Interest cost, collateral required.
Hire‑purchase / leasing	External debt	Spreads cost of equipment.	Higher total cost than outright purchase.
Share issue (private or public)	External equity	No repayment obligation.	Dilutes ownership, dividends expected.
Venture capital	External equity	Provides expertise and networks.	High cost of equity, loss of control.

5.2 Financial Statements

• Income Statement (Profit & Loss) – shows revenue, costs and profit for a period.
• Balance Sheet – snapshot of assets, liabilities and owners’ equity at a point in time.
• Cash Flow Statement – inflows and outflows from operating, investing and financing activities.

5.3 Ratio Analysis

Ratio	Formula	Interpretation
Gross profit margin	Gross profit ÷ Turnover × 100%	Efficiency of production & pricing.
Net profit margin	Net profit ÷ Turnover × 100%	Overall profitability.
Current ratio	Current assets ÷ Current liabilities	Short‑term liquidity.
Return on capital employed (ROCE)	Operating profit ÷ Capital employed × 100%	How well capital is used.
Debt‑to‑equity ratio	Total liabilities ÷ Equity	Financial risk level.

5.4 Investment Appraisal

• Payback period – time to recover initial outlay; simple but ignores time value.
• Net Present Value (NPV) – present value of cash inflows minus outflows; positive NPV = viable.
• Internal Rate of Return (IRR) – discount rate at which NPV = 0; compare with required rate of return.

5.5 Budgeting & Forecasting

• Master budget – combines sales, production, cash, and financial budgets.
• Flexible budgeting – adjusts for actual activity levels.

6 External Influences on Business

6.1 Economic Environment

• Inflation – erodes purchasing power, may increase costs.
• Interest rates – affect borrowing costs and consumer spending.
• Exchange rates – impact import/export profitability.
• Unemployment – influences labour supply and consumer demand.

6.2 Political & Legal Environment

• Regulation – health & safety, environmental standards, competition law.
• Taxation – corporation tax, VAT, customs duties.
• Trade agreements – EU, WTO, free‑trade zones.

6.3 Socio‑Cultural Environment

• Demographic trends – ageing population, urbanisation.
• Lifestyle changes – health consciousness, sustainability concerns.
• Cultural attitudes – affect product acceptability.

6.4 Technological Environment

• Automation & robotics – increase productivity, reduce labour costs.
• Digitalisation – e‑commerce, data analytics, cloud computing.
• Research & development – source of competitive advantage.

6.5 Globalisation

• Outsourcing & offshoring – cost reduction, access to skills.
• Multinational operations – need for coordination across cultures and time zones.
• Risks – exchange‑rate volatility, political instability.

7 Why Some Businesses Grow and Others Remain Small (1.3.3)

7.1 Reasons Owners Choose to Expand

• Increase market share.
• Boost profitability through economies of scale.
• Diversify risk by entering new markets or product lines.
• Ensure long‑term survival against competition and economic cycles.
• Personal ambition – status, challenge, legacy.

7.2 Internal (Organic) vs. External Growth

Aspect	Internal (Organic) Growth	External Growth
Speed	Gradual – depends on cash flow and capacity.	Rapid – via acquisition, franchising, joint venture.
Control	Retained by existing owners.	Often shared or diluted.
Risk	Lower financial risk; limited to internal resources.	Higher financial, integration and cultural risk.
Resource requirement	Constrained by internal capital, skills.	Access to external capital, technology, expertise.
Typical examples	Reinvest profits to open new shop; develop new product.	Buy a competitor; franchise a brand; joint venture.

7.3 Methods of Growth

7.3.1 Organic (Internal) Growth

Advantages	Disadvantages	Typical Problems & Mitigation
Full control remains with owners. Lower risk of cultural clash. Financing often easier via retained profits. Gradual pace allows learning and adaptation.	Growth may be slower than rivals. Limited by internal capital, skills and capacity. Risk of missing timely market opportunities.	Cash‑flow strain – use phased investment and maintain cash‑flow forecasts. Skill shortages – invest in training or recruit specialised staff before expansion. Over‑extension – set clear performance targets for each new unit and review regularly.

7.3.2 Mergers & Acquisitions (M&A)

Advantages	Disadvantages	Typical Problems & Mitigation
Rapid entry into new markets or product lines. Access to new technology, skills and assets. Potential economies of scale and scope.	High financial cost – may need borrowing or equity issuance. Risk of culture clash and integration difficulties. Possible regulatory scrutiny (anti‑trust).	Integration failure – conduct thorough due‑diligence; develop a detailed integration plan. Over‑paying – use valuation techniques (DCF, comparable multiples) and set a maximum purchase price. Regulatory delays – involve legal advisers early to anticipate competition concerns.

7.3.3 Franchising

Advantages	Disadvantages	Typical Problems & Mitigation
Fast expansion with relatively low capital outlay. Franchisees bring local market knowledge. Ongoing royalty and marketing fee income.	Less direct control over day‑to‑day operations. Risk of inconsistent service quality. Legal complexities in drafting franchise agreements.	Quality control – implement strict training programmes and regular audits. Brand dilution – use detailed operating manuals and enforce compliance. Dispute resolution – include clear dispute‑resolution clauses in contracts.

7.3.4 Joint Ventures & Strategic Alliances

Advantages	Disadvantages	Typical Problems & Mitigation
Shared risk and investment. Combines complementary strengths (e.g., technology + distribution). Access to new markets or specialised expertise.	Potential conflict over objectives and profit sharing. Complex management and decision‑making structures. Risk of knowledge leakage to a partner.	Goal misalignment – set a clear, written joint‑venture agreement outlining contributions and objectives. Decision‑making delays – establish a joint steering committee with defined voting rights. Intellectual‑property protection – use confidentiality clauses and limit access to core technology.

7.4 Why Some Businesses Remain Small

• Owner’s personal goals – lifestyle business, work‑life balance, limited ambition.
• Resource constraints – insufficient capital, skilled staff, technology.
• Market niche – serving a specialised, limited market where scale adds little value.
• Risk aversion – avoiding financial and operational risks of rapid expansion.
• Regulatory or legal barriers – licences, size caps, planning restrictions.
• Strategic choice – focus on high‑margin, low‑volume products rather than mass production.

Key Summary Points

1. Business activity is driven by needs, wants and the desire to make a profit; it can be classified by sector, size, ownership and market reach.
2. Enterprise, objectives and stakeholder interests shape the direction of a firm.
3. People are the core resource – motivation, effective management, good recruitment and training are essential for performance.
4. Marketing creates value through the 4 Ps, market research, segmentation and appropriate pricing, promotion and distribution strategies.
5. Operations management balances production methods, location, quality, innovation and capacity to meet demand efficiently.
6. Financial decisions rely on sound accounting information, ratio analysis, budgeting and robust investment appraisal.
7. External environments – economic, political‑legal, socio‑cultural, technological and global – constantly influence strategic choices.
8. Growth can be internal (organic) or external; each method has distinct advantages, disadvantages and risk‑mitigation measures.
9. Some firms deliberately stay small due to personal, resource, market or regulatory reasons.
10. Business size is measured by turnover, employees, market share, assets, geographic reach and profitability ratios.