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Business Growth

Watch this to understand growth in Higher Business (and keep your eye on the giants)

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Is there anything that can just keep growing – getting bigger and bigger? Well, not in nature anyway. Everything seems to have an upper limit.

But does this also apply in business?

FAANG is an acronym coined by investors in the US stock market. It refers to a group of tech-based firms which have achieved unprecedented growth in recent years and phenomenal returns for shareholders. You’d probably be able to guess, but we’re talking Facebook, Apple, Amazon, Netflix and Google.

These companies have employed a range of methods to achieve growth but where has the money come from to do this? Growth is a topic which can present high tariff, often quite challenging exam questions.

Let’s take a look at the giants of the business world.

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The first thing to note is that there are three distinct question areas within the Growth topic. A common mistake is that students see the word ‘growth’ and immediately start writing about methods such as [on screen text 2] and so on. And this is fine if the question specifically says ‘methods’. If the question asks about ways to achieve growth, or ways of funding growth, these have different requirements although the wording is similar.

For ways to achieve growth, go to your knowledge of takeovers and mergers, and be aware of the corresponding advantages and disadvantages. Here’s a tip for this question area; you’re not limited to takeovers and mergers, you can also talk about involvement in franchising, expanding to become a multinational, even simply growing the company’s own product range. Apple and Amazon are great examples to think of here.

A more specific question to be wary of is around ways of funding growth. Having ideas in place to open up stores in the US and Canada is great but where does the cash come from to make this happen?

There’s one hopefully obvious answer; if a business has been around a while and been successful then they should have retained profits from previous years. These are funds the business has kept and not paid out to shareholders as dividends. The big plus points here are that funds are available quickly and there are no repayments or interest rates to worry about. The FAANG companies have benefited from being in this position for a while now and have used their retained profits to execute growth plans.

Not all ventures are in such fortunate positions and so other options need to be explored. This is especially relevant given the impact of the pandemic on global trade. Ironically, covid actually boosted Amazon’s already prolific sales due to people buying more online!

In business terms, divestment is the opposite of investment. Facebook for example, also owns Instagram and Whatsapp. Very successful ventures but let’s say hypothetically Facebook was cash strapped; they could sell off or ‘divest’ these products in order to raise funds for growth elsewhere.

Another more aggressive option, let’s say for Apple, may be to attempt to take over a direct rival like Samsung with one intention in mind – Asset Stripping. This means that Apple would buy the company with the sole objective of selling off all of Samsung’s assets, from premises like factories, shops, office space, vehicles and even any inventory held in storage. In some cases, the individual assets of a business may be more valuable than the price tag to take over the company. A side benefit of asset stripping is that Apple would be reducing competition for themselves.

Additional options to fund business growth may be de-integration, a de-merger, a management buy-out or buy-in, and even outsourcing, which can appear as a stand-alone question area in a Higher exam.

The FAANG companies have certainly shown their teeth in pursuing plans for growth in recent years. So much so that Google, for example, has captured 90% of the online search market, and off the back of that, a further 37% of all digital advertising sales in the US.

Being a massive business isn’t all plain sailing though; Netflix may be the biggest player in the online streaming market for now, but it faces emerging threats from rivals like Amazon Prime Video and Disney Plus both aiming to capture some of that market share.

But maybe, unlike in nature, these giants can just keep growing indefinitely. That said, we should never forget what became of the dinosaurs...

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