Growth (AQA GCSE Business): Revision Notes
Business growth
Understanding business expansion
When businesses want to grow bigger and more successful, they look at expanding their operations. This means increasing their size, reach, or influence in the market. However, expansion isn't always straightforward - it can be risky and might not always be the best choice for every business.
Critical Point: Business expansion involves significant risks and isn't suitable for all businesses. Companies must carefully evaluate whether expansion aligns with their capabilities and market conditions before proceeding.
There are several ways to measure whether a business has successfully expanded:
- Sales revenue - how much money the business makes from selling products or services
- Profit levels - the amount of money left after all costs are paid
- Capital invested - how much money has been put into the business
- Output - the quantity of goods or services produced
- Employee numbers - how many people work for the business
- Number of outlets or locations - how many places the business operates from
- Business value - what the entire business is worth
- Market share - what percentage of the total market the business controls
Why Measurement Matters: Using multiple metrics provides a comprehensive view of business growth. A business might show increased sales but declining profits, or growing employee numbers but decreasing market share. Tracking various indicators helps identify the true health of expansion efforts.
Businesses can expand in two main ways: through organic growth (also called internal growth) or external growth. Many businesses use just one approach, whilst others combine both methods.
What is organic growth?
Organic growth happens when a business expands using its own resources and capabilities, rather than joining with or buying other businesses. It's defined as "expansion from within a business by expanding the number and/or range of products and/or locations."
This type of growth builds on what the business already does well. It uses the company's existing strengths, knowledge, and resources to grow bigger. For most businesses, organic growth is the main way they expand.
Building on Strengths: Organic growth is particularly effective because it leverages existing business capabilities. Companies can use their established brand reputation, customer relationships, and operational knowledge to expand more confidently than venturing into completely unfamiliar territory.
Methods of organic growth
Businesses can achieve organic growth through several different approaches:
Developing new products - Creating and launching new items or services to attract more customers or enter new markets.
Marketing existing products to new markets - Taking products that already sell well and introducing them to different customer groups or geographical areas. This often involves developing e-commerce capabilities to reach customers online.
Opening new locations - Establishing additional business premises, either in the home country or overseas. This can be done through franchising arrangements.
Investing in research and development - Spending money to create new products or improve existing ones.
Increasing production capacity - Buying new equipment or technology to produce more goods or services.
Outsourcing - Using other businesses to help with production or services, allowing expansion without expensive new investments.
Employee training - Helping staff develop new skills to handle new technologies or serve new markets.
Strategic Choice: The method of organic growth chosen should align with the business's strengths and market opportunities. A technology company might focus on product development, while a retail business might prioritise new locations or e-commerce expansion.
Real-world examples
Business Case Study: Just Eat
Just Eat started in 2001 and has achieved remarkable organic growth to become the world's leading online food delivery marketplace, now operating in 12 countries.
Growth Strategy: They've achieved organic growth through e-commerce by connecting customers with local takeaway restaurants, allowing even small businesses to reach more customers online.
Key Success Factor: Building a digital platform that benefits both customers and restaurant partners.
Business Case Study: Cadbury's
Cadbury's demonstrates organic growth through strategic outsourcing, particularly for seasonal products.
Growth Strategy: They don't manufacture all their products themselves, particularly seasonal items like Easter eggs. Instead, they use carefully selected partners to produce these items.
Key Success Factor: This approach allows them to expand production without investing in expensive new facilities while maintaining quality control.
Business Case Study: Premier Inn
Premier Inn has shown consistent organic growth through geographical expansion across the UK.
Growth Strategy: They've expanded from London to cities like Birmingham, Leeds, and Edinburgh, responding to increased demand from both business and leisure customers.
Key Success Factor: Strategic location selection and maintaining consistent service quality across all new outlets.
Advantages and disadvantages of organic growth
Understanding the benefits and drawbacks of organic growth helps businesses make informed decisions about their expansion strategy.
The advantages of organic growth include its lower risk compared to taking over other businesses, the ability to use internal funding like retained profits, and building on existing business strengths such as established brands and customer relationships. Outsourcing can also help achieve growth without expensive new investments.
Risk Management: Organic growth's lower risk profile makes it particularly attractive for smaller businesses or those with limited capital. Since the business builds on existing capabilities, there's less uncertainty compared to mergers or acquisitions.
However, organic growth also has disadvantages. It often depends on the overall market growing, which the business cannot control. It can be difficult for businesses to build market share if they're already established market leaders. The slower pace of organic growth may disappoint shareholders who want rapid expansion, and outsourcing can create quality control challenges and potential distribution delays.
Market Dependency: A critical limitation of organic growth is its dependence on overall market conditions. If the market isn't growing, even successful organic growth strategies may struggle to deliver significant expansion.
Additional considerations include the steady growth rate that organic expansion typically provides, and the benefits of e-commerce growth, which allows businesses to reach customers 24/7 without expensive physical locations. However, franchises can be challenging to manage effectively, and e-commerce systems can be expensive to set up and maintain, with customers expecting services like free delivery and easy returns processing.
Franchising as a growth strategy
Franchising has become a popular method of organic growth, especially for service sector businesses wanting to expand to multiple locations quickly whilst building sales and profits.
How franchising works
In a franchising arrangement, the original business (called the franchisor) grants a licence (the franchise) to another business (the franchisee). This licence allows the franchisee to trade using the franchisor's brand name and business format. The franchisee must follow certain rules about products, services, and suppliers, but this arrangement offers a relatively low-risk and low-cost way for them to start a business with some independence.
Control vs Independence: The franchisor remains in control as the original owner of the business idea and brand. This relationship requires careful balance between maintaining brand standards and allowing franchisee autonomy.
Franchising in the UK
Franchising plays a significant role in the UK economy. Recent statistics show that 97% of franchise units are profitable, including new businesses. In 2015, franchises generated £15.1 billion in annual sales through 44,200 franchised outlets, employing 621,000 people.
UK Franchising Statistics
The UK franchise sector demonstrates impressive scale and success:
- Over 901 different franchisor brands operating across various sectors
- Annual turnover: Many franchises exceed £250,000 per year
- Start-up costs: Can be as low as £10,000, typically around £50,000
- Sector focus: Particularly popular in service industries
- Common types: Property-related services (estate agency, cleaning, gardening)
Service Sector Dominance: Franchising is particularly popular in the service sector because service businesses often have lower capital requirements and can be more easily standardised across different locations.
Benefits and challenges for franchisors
For businesses considering franchising as a growth strategy, there are several advantages. The franchisor maintains control over key aspects of the brand and operations whilst requiring less finance for expansion since franchisees provide most of the capital. There's minimal day-to-day involvement needed, freeing up time and resources. Franchisees bring entrepreneurial energy to make each location successful, enabling rapid expansion across multiple locations. The business also benefits from multiple revenue streams through franchise fees and ongoing royalty payments.
However, franchising also presents challenges for franchisors. They lose some operational control as franchisees run the day-to-day business. It can be difficult to recruit high-quality franchisees who prefer management roles to running their own businesses. If too many franchises are sold in one area, they may compete with each other, making it harder for individual franchisees to succeed. The franchisor's reputation depends on franchisee performance, and poor decision-making by franchisees can damage the brand. Additionally, franchisors have limited control over how quickly the business grows once franchises are awarded, and they must share revenue with franchisees.
Reputation Risk: The franchisor's brand reputation is entirely dependent on franchisee performance. Poor service or quality at any franchise location can damage the entire brand, making franchisee selection and training crucial.
Key Points to Remember:
- Organic growth means expanding from within using the business's own resources and capabilities
- It can be measured through sales, profits, employees, outlets, market share, and business value
- Main methods include new product development, market expansion, new locations, and outsourcing
- Advantages: Lower risk, internal financing, and building on existing strengths
- Disadvantages: Slower growth, market dependence, and potential quality control issues
- Franchising is a popular organic growth method, especially in service sectors, but requires balancing control with franchisee independence
- Success depends on choosing the right growth method for your business's strengths and market conditions