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Business Planning - Survival and Growth

This resource is designed specifically for Unit 1 of the Edexcel BTEC National qualification, 'Introduction to Business'.

Aims

The BTEC Business resource, Profits and Losses,(http://www.bized.co.uk/educators/16-19/business/accounting/lesson/profitloss2.htm) looks at the concept of break-even analysis and how business organisations must aim to achieve this, before they can consider their long-term prospects.

This resource now looks at how businesses plan for their survival and aim to grow in the future to become profitable ventures. In working through this resource you will find out about the following:

  • That break-even is necessary in the long-term
  • How competition can threaten the survival of a business
  • How businesses progress beyond survival to growth and profitability
  • How they can achieve economies of scale
  • How business growth can be observed in the real world

Data for Business Survival Rates

The Small Business Service, a Government-backed agency of the Department of Trade and Industry, produces research into the number of small businesses in the various regions of the UK and indicates their survival rates.

These data are collected from businesses that are registered for VAT. One year and three year survival rates are given. The last available data (published in January 2004) indicate that one-year survival rates have improved steadily since 1993, when they stood at approximately 85%, to 2001, when they reached over 90%. Three-year rates, over the same period have risen from just over 60% to about 68% in 2001.

These data show that small firms' survival rates have increased generally over the period 1993-2001. But which firms are included in the figures? Are any businesses left out? How accurate can we say they are?

Firstly, the data only includes firms that are registered for VAT. A business only has to become VAT registered when its turnover reaches a certain point (known as a 'threshold'). In 1993, the VAT threshold was £37,600. By 2001, it had risen to £54,000. This means that small businesses that make less than £54,000 in sales are not counted in the Small Business Service data.

Another source of small business survival data is Barclays Bank, who produce figures for survival rates in England and Wales based on the bank's internal records of business accounts that open and close. They tend to include more small firms whose businesses are not registered for VAT. The Barclays data indicate that survival rates improved significantly between 1999 and 2001.

A final important point about business survival rates is that the data do not necessarily reveal the number of firms that fail. Barclays carried out research in 2002 suggesting that there are a number of different reasons for firms closing:

  • 48% of the firms surveyed by Barclays closed their business voluntarily
  • 29% sold the business to another person or firm
  • Only 5% of the firms closed due to insolvency or bankruptcy

This is a key finding, one that will be important to remember when we look directly at examples drawn from the real world.

It has been suggested by analysts that the reasons for improved business survival rates can be summarised as follows:

  • Better planning
  • More advice from business support organisations
  • Guidance from banks
  • Better professional help

Barclays produce a Small Business Survey(http://www.business.barclays.co.uk/BBB/A/Content/Files/SmallBusinessSurveyH12004.pdf) [PDF, 183 KB] that is a good source of information on business start-ups and survival. The most recent of these covers the first half of 2004.

Activity 1

Go to the Barclays Small Business Survey(http://www.business.barclays.co.uk/BBB/A/Content/Files/SmallBusinessSurveyH12004.pdf) [PDF, 183 KB] and find out:

  1. Which areas of the UK have seen the highest start-up rate?
  2. Which business sectors have seen the highest growth in numbers of firms starting-up?
  3. Give two reasons to explain why these sectors are growing faster than others.

Activity 2

Look at the Web sites of some of the other major high street banks (links given below). What kinds of help and guidance do the banks give? What else do you think the banks could do to improve business survival and growth rates?

  • NatWest (http://www.natwest.com/smallbusiness/index.asp?navid=SBS)
  • LloydsTSB (http://www.lloydstsbbusiness.com/home.asp)
  • HSBC (http://www.ukbusiness.hsbc.com/hsbc)

Activity 3

This is based on a study of the book publishing industry. Firstly, there's a summary of the industry structure. Then we look into the trend towards consolidation, (or concentration of market power in the hands of a small number of large firms) which has occurred within this industry. Finally, you get to predict the future for book publishing.

Industry Brief

Introduction

The publishing industry is a great example of how businesses behave over time. Like many other industries there has been a consistent process of consolidation in book publishing in the past twenty years. But the question is: do consumers benefit from the forces that have led to this consolidation, or are customer choice and diversity shrinking as big business marches forwards?

Observers of the publishing industry have frequently raised their concerns over recent years about the growing concentration of power within the industry. They are worried about the activities of conglomerates (large corporations) that have bought and merged many publishing companies and book retailers. This, they claim, means that large global firms are able to control the industry, leading to concerns over:

  • the decline in quality of books published
  • the falling number of radical books being published
  • reduced competition in the industry
  • the large fall in the number of independent book publishers and retailers

Market structure

The market shares of book publishers (UK data) are as follows:

  • Bertelsmann = 16.8%
  • Hachette Livre = 12.6%
  • Pearson = 10.2%
  • News Corporation = 9.5%
  • Holtzbrinck = 4.5%
  • Time Warner = 4.0%
  • Bloomsbury = 2.0%
  • Simon & Schuster = 1.8%

Source: Booksellers Association reports(http://www.booksellers.org.uk/industry/display_report.asp?id=422)


Who are these firms?

Most of these top eight publishers are global companies, with interests in many diverse businesses. There is a growing trend, though, towards very large media groups buying up smaller publishers. For example, News Corporation is the firm controlled by the Murdoch family, owning TV broadcasters, newspapers, as well as book publishers. During the last decade, News Corp bought up HarperCollins, a well-known publisher. Pearson is unusual in that it is British-owned; its portfolio of publishing businesses includes the famous Penguin brand. Bloomsbury is the publisher of the hugely successful 'Harry Potter' books.


What do they do?

Book publishers need to carry out the following tasks in order to be in business:

  • find material for publication
  • edit it
  • print a number of copies (often thousands)
  • market the copies to retailers and the buying public

Nowadays, with very large retailers requiring stocks of titles this is a very expensive business.


What is their strategy?

The strategy used by most of the top eight publishers is aimed at consolidation, in other words, the process of buying up a number of 'imprints', (publishing brands, such as Penguin), in order to make large economies of scale:

  • Technical economies made in producing books, such as by using expensive machinery intensively
  • Commercial economies made by bulk buying paper
  • Marketing economies, by improving distribution

But these large corporations find that there is a limit to the additional savings they can make. Their next move is to make savings within the merged businesses that they control, by:

  • Merging brands together to cut costs
  • Cutting the number of books published

All this adds up to fewer books being published.


Is this an inevitable process?

Not entirely. Some independent publishers can remain in business by making sure they occupy profitable niches in the market. Larger publishers buy many of these independent firms.

Lifecycle of market concentration in the publishing industry

Stage 1: The predator firm targets smaller or weaker businesses in order to gain economies of scale.
Stage 2: The predator firm sheds costs and makes economies of scale.
Stage 3: New independent firms start up to fill niches in the market that have not been seen or are unavailable to the predator.
Stage 4: The niche firms become new targets for the predator firm.

The lifecycle of market concentration in the publishing industry

In food retailing, supermarkets are a big threat to smaller producers who are unable to meet the demands from Tesco or Asda, for example, for big discounts. These same companies are exerting similar pressure on book publishers and retailers by buying a very small range of titles (often around ten per month), but selling a huge number of each one of them. In this way, if a publisher can get a book onto the shelves of a large supermarket company like Sainsburys or Morrisons, it is almost certain to become a bestseller.

So, there appears to be a constant process of consolidation, renewal of small players in the market, then a return to consolidation once again. However, some industry observers think that the process of consolidation is likely to be reversed as a result of advances in personal computing power.

One writer has predicted that with the advent of industry-standard digital printing and the growth of the Internet, many of the tasks previously needed to be performed by publishers and book retailers will be able to be done better by home personal computers.


Tasks

  1. How do growing publishing firms gain economies of scale?
  2. What are the dangers of growing too large? See our notes on diseconomies of scale. (http://www.bized.co.uk/learn/economics/firms/economies/notes.htm)
  3. Look at the Lulu Web site(http://www.lulu.com/about/whatislulu.php), set up by Bob Young, co-founder of Red Hat Linux, to find information on this new idea in self-publishing. What impact do you think this idea and others like it may have on the publishing industry? What limitations are there in the idea that may prevent its spread?

Further Reading