Growing the Business

Internal (organic) growth means a business expands using its own resources and capabilities, without combining with another firm.

Two main routes for internal growth:

1. New Products

A business can develop new products through research and development (R&D) — investing time and money into innovation. This lets the business attract new customers or persuade existing customers to spend more. For example, a confectionery company might develop a new flavour range to grow revenue without changing its overall structure.

2. New Markets

A business can sell existing products to new customer groups. This can be achieved by:

• Changing the marketing mix — adapting price, promotion, or distribution to appeal to a different audience
• Using technology — e-commerce allows a business to reach customers nationally or globally with minimal additional cost
• Expanding overseas — entering foreign markets to grow the customer base

Key advantages of internal growth:

• The business retains full control — no external shareholders or partners to satisfy
• Growth is funded from profits, keeping costs lower
• Change is gradual, giving management time to adjust

Key disadvantage:

• Internal growth is slower. A competitor using external growth could rapidly overtake the business in market share.

Exam tip: Questions may ask you to evaluate internal vs external growth for a specific business. Consider the business's size, cash position, and how urgently it needs to grow.

External (inorganic) growth occurs when a business combines with or acquires another business.

Two methods:

1. Merger

Two businesses agree to combine and form a new, larger business. Both sets of owners typically negotiate terms, and control is shared in the new entity.

2. Takeover

One business purchases a controlling stake in another, often without the target firm's agreement. The acquiring firm gains ownership and control.

Worked example: A UK supermarket chain (turnover £2bn) wants to grow rapidly. Rather than opening new stores one by one (internal growth), it acquires a regional rival with 80 outlets for £500m. This gives it immediate access to new locations, an established customer base, and extra supply chain capacity.

Comparing growth methods:

Factor	Internal growth	External growth (merger/takeover)
Speed	Slow	Fast
Risk	Lower — builds on existing strengths	Higher — integration problems, cultural clashes
Cost	Funded from profits or loans	Large upfront payment required
Control	Owner retains full control	Control may be diluted or shared
Example	Launching a new product line	Buying a rival business

Key term — merger: when two businesses agree to join together to form a single, larger business.

Key term — takeover: when one business buys a controlling interest in another business, gaining ownership and control.

As a business grows significantly, it may seek to convert to a public limited company (plc).

A plc can sell shares to the general public through a stock market flotation (also called an IPO — Initial Public Offering). This gives the business access to very large sums of capital that would be impossible to raise through loans or retained profit alone.

Advantages of becoming a plc:

• Can raise very large amounts of finance by selling shares on the stock market
• Greater public profile and brand credibility
• Easier to make acquisitions using shares as currency

Disadvantages of becoming a plc:

• Loss of control: original owners' percentage stake is diluted as new shareholders join
• Takeover risk: shares traded publicly mean a rival can buy enough shares to take over the business
• Cost and administration: plcs must publish annual accounts, hold AGMs, and meet strict regulatory requirements — all time-consuming and costly
• Short-term pressure from shareholders who expect regular dividends can conflict with long-term investment decisions

Worked example: A family-run engineering firm has grown from a garage startup to a £40m business over 15 years. The founders want to build a new factory (cost: £12m) but cannot fund it from retained profit alone. They float on the stock market, raising £15m from new shareholders. The downside: the founders' combined stake falls from 100% to 52%, reducing their control.

Exam tip: On a 6-mark evaluate question about flotation, argue both sides — access to large-scale finance vs loss of control and takeover risk — then conclude with reference to the business's specific situation (e.g. how much capital it needs, how much control the owners want to keep).

Growing businesses need finance to fund expansion. Sources fall into two categories.

Internal sources (from within the business):

1. Retained Profit

Profit kept within the business after paying tax and dividends. This is the cheapest source of finance — no interest to pay and no loss of control. However, it may be insufficient for large-scale growth and takes time to accumulate.

2. Selling Assets

A business can sell assets it no longer needs (e.g. surplus property, old machinery) to raise cash. This is a one-off measure and not a reliable long-term source.

External sources (from outside the business):

3. Loan Capital

Borrowing from a bank or other lender. The business repays over time with interest. Suitable for established businesses with a good credit record. Risk: if sales fall, the business must still make repayments.

4. Share Capital

Selling new shares — either privately (for a private limited company) or publicly (for a plc via stock market flotation). Raises large sums with no repayment obligation, but dilutes existing owners' control.

Source	Cost	Risk to owner	Best for
Retained profit	Lowest — no interest	Lowest	Steady, gradual growth
Selling assets	None — but one-off	Low	Short-term cash need
Loan capital	Interest payments	Moderate	Medium-term investment
Share capital (flotation)	Dilution of ownership	Loss of control	Large-scale, rapid growth

A business's aims and objectives do not stay fixed. As a business grows and the world around it changes, it must adapt what it is trying to achieve.

Five reasons objectives change:

1. Market Conditions

A recession may force a business to shift its primary objective from growth to survival. A booming economy may allow it to set ambitious market-share targets.

2. Technology

New technology can open opportunities (e.g. selling online reaches global customers) or create threats (e.g. a competitor automates production more cheaply), causing a business to revise its strategic aims.

3. Performance

If a business is underperforming — falling sales, shrinking margins — it may shift from a growth objective to a cost-cutting or quality-improvement focus.

4. Legislation

New laws can force changes. For example, environmental regulations may require a business to invest in cleaner production, shifting resources away from growth objectives.

5. Internal Reasons

Leadership change, a shift in ownership structure (e.g. flotation), or a desire by founders to exit can all trigger new strategic directions.

Key point: As businesses grow, their objectives typically evolve through these stages: survival → profit → growth → market dominance. A brand-new startup focuses on survival; a well-established business focuses on growth or CSR.

When a business's aims shift, this is visible in specific operational decisions.

Common changes in objectives and what they look like in practice:

Change in objective	What the business actually does
Focus on survival	Cuts costs, reduces headcount, delays investment
Focus on growth	Enters new markets, launches new products, hires more staff
Entering a new market	Adapts marketing mix for new audience; may use a new distribution channel
Exiting a market	Discontinues a product range; withdraws from overseas operations
Growing the workforce	Recruits, trains, and expands teams
Reducing the workforce	Redundancies; may outsource tasks instead
Increasing product range	Develops new product lines; may acquire a competitor
Decreasing product range	Rationalises to core products; focuses on highest-margin items

Worked example — Startup to plc: Nina launches a subscription snack box in 2018. In year 1, her objective is survival — breaking even and building a customer base. By 2021, with 10,000 subscribers, her objective shifts to profit maximisation. By 2024, having expanded to Europe, she is focused on market growth and seeks external investors. In 2026, the business floats on the stock market; her objective is now market dominance. At every stage, the marketing mix, staffing levels, and product range decisions reflect the current objective.

Exam tip: When a question describes a business scenario and asks "why might the business change its objective?", identify which of the five drivers (market conditions, technology, performance, legislation, internal reasons) best fits the scenario. Apply it explicitly to the business in the question.

Exam tip slide

Common mistakes to avoid:

• Confusing a merger (mutual agreement, both parties consent) with a takeover (one business buys control, often without consent). The distinction matters in the exam.
• Saying that internal growth is "better" than external growth without qualification. Always consider the context: How quickly does the business need to grow? How much capital does it have? How much control do the owners want to keep?
• Listing sources of finance without explaining why a particular source suits the business in the question. Match the source to the business's size, ownership type, and growth ambition.
• Forgetting that a plc faces takeover risk — this is often the most significant disadvantage for exam purposes, not just the admin burden.
• Treating business objectives as permanent. The exam frequently rewards candidates who recognise that objectives evolve as a business grows through different stages.

Key evaluation framework for 6-mark questions:

When asked to evaluate whether a business should use a particular growth method or source of finance:

1. Argue the benefits (with examples or data from the question)
2. Argue the drawbacks
3. Conclude with a clear judgement tied to the specific business — its size, stage of growth, market, and ownership structure