How does a business grow, and how does it pay for that growth?
Methods of business growth and their impact: internal (organic) growth and external (inorganic) growth (merger, takeover); the public limited company (plc) as a type of ownership for growing businesses; and sources of finance for growing and established businesses (internal: retained profit, selling assets; external: loan capital, share capital including stock market flotation).
A focused answer to Edexcel GCSE Business 2.1.1, covering internal (organic) and external (inorganic) growth, mergers and takeovers, the public limited company, and the internal and external sources of finance for growing businesses including stock market flotation.
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What this dot point is asking
Edexcel wants you to explain the methods of business growth (internal and external), the public limited company as an ownership form for larger businesses, and the sources of finance that growing and established businesses use.
Methods of business growth
Organic growth is built step by step: a business sells more of its existing products, develops new ones through research and development, or reaches new customers by changing its marketing mix or expanding into new areas, including overseas. It is cheaper, lower-risk and keeps the owners in control, but it is slow.
External growth is faster. A merger is when two businesses agree to combine into one; a takeover (or acquisition) is when one business buys enough of another to control it. Both can rapidly add customers, sales and market share, but they are expensive, can be risky (the two businesses may not fit well together, and cultures can clash), and often require heavy borrowing.
The public limited company (plc)
As a business grows it may "go public" and become a plc. The big advantage is access to large amounts of finance by selling shares to the public. The cost is loss of control and privacy: the company must publish detailed accounts, meets more regulation, and its shares can be bought by anyone, so the original owners can lose control. This is the difference from a private limited company (Ltd), which can only sell shares privately.
Sources of finance for growth
A growing business funds expansion from internal sources where it can: retained profit (cheap, no interest, no loss of control) and selling assets it no longer needs. For larger growth it turns to external sources: loan capital (a large loan, repaid with interest) and share capital. The biggest external step is a stock market flotation, where a company becomes a plc and sells shares to the public, raising substantial finance but giving up some ownership and control. The choice depends on how much is needed, the cost, and how much control the owners are willing to give up.
Try this
Q1. State one method of external (inorganic) growth. [1 mark]
- Cue. A merger or a takeover.
Q2. Explain one advantage to a business of growing organically rather than by takeover. [3 marks]
- Cue. It is cheaper and lower-risk and keeps the owners in control, avoiding the cost and risk of buying another firm.
Exam-style practice questions
Practice questions written in the style of Pearson Edexcel exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Edexcel 20192 marksState two internal sources of finance a growing business could use. (Paper 2, Section A)Show worked answer →
A 2-mark state question, one mark per correct internal source.
The internal sources Edexcel lists are: retained profit and selling assets.
Markers want internal sources specifically. Loans and share capital are external sources, so they do not count here. As Edexcel names only two internal sources, both should be given.
Edexcel 20219 marksA medium-sized company wants to grow quickly. Justify whether it should grow by taking over a competitor or by organic growth. (Paper 2, Section C)Show worked answer →
A 9-mark justify question (Section C) needs a clear choice, a developed chain, and the alternative weighed.
A takeover grows the business quickly by buying a competitor, instantly gaining its customers, sales and market share, which suits a firm that wants to grow fast, and removes a rival. But takeovers are expensive, risky (the two businesses may not fit, cultures can clash) and may need large borrowing.
Organic (internal) growth, by selling more, launching new products or entering new markets, is cheaper, lower-risk and keeps control, but it is slow, which does not suit a firm wanting rapid growth.
A strong answer judges based on the aim: if speed and market share matter most and the firm can fund it, a takeover is justified despite the risk; if the firm prefers steady, controlled, affordable growth, organic growth is better. Markers reward a supported decision, not two lists.
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Sources & how we know this
- Pearson Edexcel GCSE (9-1) Business (1BS0) specification — Pearson Edexcel (2017)