Business Growth

1. What is Business Growth?

Definition: growth = expansion → the size / scale of operation of a business increases (small scale → large scale).

Examples of growth (all move forward)

• Outlets: 2 → 10 outlets. Airline: 50 → 80 aircraft.
• Individual: assistant manager → manager (moves to a higher level of the structure).
• Legal structure: sole trader → partnership.
• Geography: one city (local) → whole country (national).
• Market share: 5% → 15%.

2. Why do owners want to grow?

① Owner's objective

Some owners want large scale to maximise profit in the long term. But it is a personal choice: some owners do not want extra workload / burden, so they stay small on purpose.

② To achieve economies of scale (EoS)

EoS = a cost advantage of large-scale over small-scale business (covered fully in Unit 4 – Operations).

2 outlets → small orders. 10 outlets → bulk order → supplier gives discount (you are a major customer = high bargaining power) → cost of materials ↓.

③ To reduce the chance of takeover

Takeover usually happens when a business is failing. Small businesses fail more often — lack of finance, lack of capital, cash-flow problems. A bigger business is safer, so risk of being bought out falls.

④ Improve brand image & increase market share

Market share = sales of one business against sales of the whole market. e.g. Toyota has the highest market share in Pakistan's car industry — most customers and highest revenue vs Kia, Hyundai, Honda, Suzuki.

Expand → available nationally → more accessibility to customers → market share ↑.
Expand → more visibility (Karachi, Lahore, Islamabad, abroad) → customers perceive good quality → brand image ↑. (Brand image = how the consumer perceives you.)

⑤ To maximise profit

In order to maximise profit → you need to grow (bigger scale, more sales, lower unit costs).

⑥ More sources of finance open up

When you ask a bank for a loan or go to investors, they look at the business size. Large scale = financially stable in the market → good chance of repayment and can pay the interest easily. So size influences sources of finance.

3. Methods of Growth: Internal vs External

There are two methods: Internal (= organic growth) and External (= integration: merger / takeover).

Internal (organic) growth

Analogy – body builders: one type eats naturally, sleeps deeply, exercises regularly, no supplements or steroids → results come only after 3–5 years. Same for business: it grows its own operations by reinvesting profit, technology upgrades, new products, new markets, more branches of its own.

Ploughing back profit = instead of enjoying the profit, you reinvest it for further expansion. e.g. a factory reinvests profit to extend its premises.

Methods of internal growth

1. Enter new markets – Karachi → Lahore → Islamabad, then export abroad ⇒ sales ↑, customers ↑.
2. Target new segments – e.g. J. (Junaid Jamshed): started with eastern shalwar kameez → groom wear → footwear → perfume → ladies. Not merging with anyone — just widening the product range / portfolio.
3. New product development – e.g. Zero: started with smart watches, now earbuds too. A car maker that made petrol cars now builds EVs. Same market, new products (innovation).
4. Advertising & promotion – viral marketing, new marketing techniques, campaigns ⇒ more potential customers.

4. External Growth = Integration

Integration = to combine (like an "integrated system" = combined system). Two kinds: merger and takeover.

Merger: two businesses unite and combine their resources to operate as a single unit / form — labour, technology, ideas and finance all combine, then they expand together.

Takeover: one business buys more than 50% of the ownership of another. Even 51% is enough ⇒ takeover.

Example: Uber took over Careem in Pakistan ⇒ Uber = acquirer, Careem = target.

Why do both count as integration? In a merger you combine resources. In a takeover the target's resources (labour, finance, technology, ideas) come under the acquirer → they are combined too ⇒ both = integration.

5. Types of Integration

Three types: horizontal, vertical (forward / backward) and conglomerate. Key words to decide: industry and stage of production.

A. Horizontal integration

Definition: two businesses integrate (merger or takeover) and both belong to the same industry AND operate at the same stage of production.

Examples: Warid + Jazz (both telecom, both give mobile networks); Uber + Careem (both online cab services); two car manufacturers (both automobile, both manufacturers).

Reasons for horizontal integration

1. Reduce competition – Jazz and Warid were rivals; as a single unit, competition falls. Large firms often take over small ones for this — small firms may not be direct competitors but are still a threat.

2. Greater economies of scale – same supplies needed ⇒ buy in mega quantity ⇒ bigger discount ⇒ cost ↓ ⇒ more price-competitive, lower prices, tougher for rivals.

3. Increase market share – each has its own customer base; after integration the customer base is united ⇒ bigger share.

4. Gain each other's USP / competitive advantage – Warid won the government bid for 4G LTE first in Pakistan; Jazz was on 3G and failed to win the bid. After integration 4G reached Jazz customers too ⇒ gap filled.

B. Vertical integration

Definition: two businesses integrate (merger or takeover); they belong to the same / interrelated industry but operate at a different stage of production.

• Car manufacturer (secondary) + showroom / retailer (tertiary – a service business that sells). Same industry (cars), different stage.
• Car manufacturer + tyre supplier – tyres are an input used to make the car.
• Education: O-levels school → A-levels college → university (they come in this order, so different stages).

Vertical FORWARD = integrate with the customer business (the business at the next stage). Car maker → showroom; OPTB → Foodpanda.

Vertical BACKWARD = integrate with your supplier business (the business at the earlier stage). Car maker → tyre supplier; OPTB → KNNs.

Reasons for vertical integration

Forward → to get access to the market. You can produce goods but have no channel to reach customers. A retailer / delivery app is close to the customer and will promote you most — more display, marketing, offers (showroom pushes your cars; Foodpanda promotes OPTB) — because the interests and benefits are connected.

Backward → to get control over the supply chain. The supplier (KNNs) will make sure supplies are not delayed and are of high quality, because if OPTB fails to deliver on time or compromises quality, KNNs suffers the loss as well. Plus you may get exclusive supply (monopoly-like) ⇒ competitive advantage: right time, right quantity, quality unaffected.

C. Conglomerate integration

Definition: two businesses integrate (merger or takeover) and they belong to different industries ⇒ it is diversification through integration. e.g. a car manufacturer takes over an A-levels college (automobile ≠ education: different market, different industry).

• Perfect conglomerate = different industry AND different stage of production — nothing in common.
• It is still a conglomerate if the industry is different but the stage is the same (e.g. a car manufacturer takes over a clothing manufacturer – both manufacturers).

Examples: Reliance (India): telecom, entertainment, construction, education. Amazon (US, e-commerce) took over a restaurant. Schneider Electric (switchboards & panels) took over a UK transport company.

Reason & benefits / drawbacks

Reason: risk diversification strategy. e.g. Pepsi — strength: specialised in food & beverages (Lays, Doritos, Pepsi, Slice…) = competitive advantage. But also a weakness: not diversified, all in one industry ⇒ risk is high. Entering different industries spreads the risk.

Benefit – cross financing / cross subsidising: a profitable part funds a weak part. e.g. an A-levels college (1500–1600 students, good profit) cross-finances an O-levels school that is struggling (few admissions) — profit is invested to develop and grow the weaker business. A firm that already excels in its own industry can use its finance to develop the new one.

6. Friendly vs Hostile Takeover

Takeover = one business buys >50% ownership of another. Two types:

Hostile takeover: the target is usually struggling (no financial success, no returns / profit for shareholders). Bids and offers come, but the management and board of directors are not willing to sell. Shares belong to shareholders, so the acquirer goes directly to the shareholders and offers more money (e.g. double the share price) for their shares. If they sell ⇒ ownership passes to the acquirer ⇒ takeover. Hostile because it is against the willingness of management and the board.

Friendly takeover: the acquirer approaches and says "we want your business, sell if you wish"; management, board and shareholders agree on mutual, good terms and conditions ⇒ friendly.

7. Problems of Mergers & Takeovers

① Coping with different cultures

Business practices, culture and working conditions differ (even in the same industry) ⇒ conflicts and disagreements. In a merger, whose culture and conditions will be followed? In a takeover, the new owner brings its own rules, regulations, terms & conditions — hard for workers to adjust (like moving into a new home with new house rules).

② Pay & conditions change

Policies may change after integration; the acquirer introduces its own pay, working conditions and payment method ⇒ employees may be unhappy.

③ Employee attitude turns negative

Before the deal, workers seemed fine / involved (the deal needed their participation). After it: working conditions change, management does not listen, no participation, no respect, status or recognition ⇒ a toxic culture ⇒ some workers leave.

④ Diseconomies of scale

The business has grown a lot → taller structure, many levels, many managers and workers ⇒ communication & coordination are difficult (even with technology), decision-making slows, errors, unclear orders, workers feel remote.

⑤ Less staff involvement / motivation

Workers just do their work — no participation, no motivation ⇒ productivity falls.

⑥ Overall cost of production rises

Demotivation + communication and coordination issues ⇒ overall cost of production ↑.

8. Impact of Integration on Stakeholders

Stakeholders = all people directly or indirectly connected with the business: management, employees, customers, community, government, suppliers, banks. A merger / takeover can affect them positively or negatively.

9. Strategic Alliance

Definition: an agreement to cooperate between two or more businesses to achieve a common objective. They do not start a third business or form a new entity — each carries out its operations separately and they only share resources (win-win). Can be local, national or global.

Examples

• Coffee shop + bookstore – customers browse bestsellers and take a coffee break in one go ⇒ both target customers.
• Liberty Books + Gloria Jeans (Karachi) – Liberty took ~10–15% of the café's area; customers buy books and coffee; both share rent and resources to attract more customers. No new business created.
• Uber + Spotify – Uber riders get free Spotify Premium / can play their own music in the car. Spotify gets subscribers, Uber gets customers.
• Shared distribution – company X and Y combine distribution facilities and cut shipping cost.

Quick Recap — Business Growth Cheat-Sheet