We are living in uncertain economic times, and now more than ever businesses need to reflect on how they can not only survive but thrive in today’s economy. Harvard business School have investigated the possible impact that the coronavirus has had on small business owners. 77% of small business owners are “very worried” about impact of the coronavirus, and 54% expect the US to enter a recession within 12 months (Kost, 2020). It is important that all business owners consider ways both internal and external which will affect business growth. the business that will help them to develop and grow their businesses both responsibly and effectively in today’s economy.
Internal growth is also known as organic growth, this is when a business expands using its own resources. For many businesses, especially small businesses internal growth is their only option due to lack of resources. Businesses can develop through analysing their opportunities and understanding their customers demographics better. Businesses should be innovative and may decide to expand through diversifying and introducing new products or services. Diversifying has proved to be an effective and quick way for businesses to expand. A new range of products or services will likely increase the pool of customers, and so diversification is crucial for long-term success. Management lecturers suggest diversification into similar business can strengthen market power and allow the business to gain a competitive advantage (Amit and Livnat, 1988). Therefore, diversification is an important factor that should be considered by business owners looking to expand.
A business owner may decide to develop through investment in technology. This may involve using social media outlets, such as Instagram and Facebook. Such platforms are used by lots of well-known businesses successfully as marketing tactics, to attract customers on a global scale for little to no cost. In addition to this, investment in technological equipment can help to simplify business operations and logistics, which can result in saving valuable time, cutting costs in the long term and increasing productivity. A recent report suggests that investment in technology can increase productivity by up to 20% (Mann and Adkins, 2017). This implies investment in technology can help a business to develop effectively and efficiently.
Many would argue that organic growth is the most appropriate way for businesses to develop in today’s economy. Using organic growth means that expansion of the business can be funded by retained profit, and therefore less pressure will be put on the business to gain extra capital from external sources such as banks or investors. In addition to this, the business will usually expand at a steadier rate than inorganic growth, preventing rapid development which is hard to cope with and sustain. However, in some cases organic growth is painfully slow due to reliance on the businesses own resources. Moreover, the growth of the business may be dependent on the growth of the market and economy.
A business owner may decide to expand their firm through inorganic growth. Inorganic growth refers to expanding through sources external to the business, such as mergers or takeovers. Using such method of expansion has proved to result in quicker and often more profitable growth than organic. Businesses that use mergers or takeovers tend to increase market share instantaneously, as they are gaining the expertise of a whole other company.
However, inorganic growth has a significant cost and may result in large debt. As a result, many businesses see inorganic growth as too risky and use only organic growth. According to a report on merger failure, theoretical literature of mergers and takeovers often fail to highlight the high percentage of merger failures and purely focus on the potential profit (Hviid and Prendergast, 1993). This suggests, that while inorganic growth may be a great option for some companies with large cash flow available, for others it may be too costly and does not guarantee success.
External factors can also have a huge impact on the growth and development of a business.
The economy is one of these external factors. Unemployment rates indicate the performance of the economy. During a recession unemployment rates are high and so people have less disposable income and businesses may face reduced sales and therefore less profits to reinvest. Interest rates can also affect the development and growth of a business. When interest rates are high, consumers are more likely to save and stop using credit cards. However, when rates are low the opposite happens. Businesses will likely experience an increase in sales, especially those selling luxury goods. During a recession interest rates are often reduced to encourage spending. When the economy is booming businesses will be more likely to afford to develop and grow.
Politics can also have an effect on the growth and development of businesses. Yale University professor, William D. Nordhaus, suggests there is an increasing political influence in economic decisions. The interaction between politics and the economy has been named the political business cycle (Nordhaus, Alesina and Schultze, 1989). Through monetary policy the government can manipulate interest rates, money supply and exchange rates. In theory if they keep inflation at around 2% consumers will have confidence to make spending decisions and businesses will have the confidence to make investment decisions. Through fiscal policy the government also make important tax decisions which impact businesses such as corporation tax, V.A.T and business rates. Depending on how much businesses are taxed may determine if they can afford to make investment in development.
Another external factor is business ethics. There is an increasing pressure on businesses to make their practices more ethical. Businesses are expected to have ethical marketing, treat suppliers well and have fair treatment of workers, ensuring conditions are safe and pay is fair. Businesses who are ethical usually have higher costs than those who are not, therefore they usually do not have as much money to reinvest in the development of the business.
Some businesses decide to have a corporate social responsibility (CSR), meaning they accept responsibility for stakeholders beyond their legal duty. The Body Shop is an example of a company who have a large focus on CSR, through its history of charitable donations, environmental campaigns, treatment of suppliers and staff and support of animal rights (Dennis, Neck and Goldsby, 1998). Despite the high cost of going the extra mile to have corporate social responsibility, this will result in a better corporate reputation. As a result, the company will likely attract more customers and therefore sales, as such the business may have more capital to invest in growth such as new locations.
In conclusion, there are many elements, both internal and external which impact growth and development of a business. It is important to consider what type of business it is, and what type of goods or services are being sold. In addition to this, the business should explore what resources are available to them, such as capital. Development of a business can also be affected by external factors, which can create unforeseen circumstances, such as changes in the economy like interest rates and exchange rates. It is also important that businesses do not jeopardise their ethical policies in an attempt to speed up development of the business, doing so could affect the business’ corporate reputation. The most appropriate way for a business to expand and develop is different for every business, and they should carefully consider all options.