Module Code: UMED8A-15-1

Module Title: Understanding the Business and Economic Environment

Section: A Business Finance Microeconomic Environment of Business

a) Outline some of the main methods of business expansion, giving relevant examples
for each.
The two main methods of business expansion are internal and external expansion.

Growth by internal expansion utilizes the existing resources and capital optimally. The
business may pursue internal growth by debt/equity financing, intensifying the scale of
operations, hiring efficient employees, and penetrating the market through promotional
activities and product development. Diversification is also an internal growth strategy
that helps to allocate investments between firms which helps to lower the risk.
Diversification helps the firm to establish a new line of products that differs from its
existing operations. The three types of diversification strategies are Horizontal
integration, Vertical integration, and Conglomerate diversification. Horizontal integration
includes the addition of parallel products in the current product line whereas vertical
integration includes the addition of a complementary product line. Vertical integration is
further categorized into forward and backward integration. Conglomerate diversification
involves the introduction of completely new products which is not related to the existing
product line. Example: Apple Inc. is a diversified company because it provides a wide
range of products and services. (Gao, 2021).

Growth by external expansion occurs when a business acquires or combines with other
organizations mutually agreed upon. The business may pursue external growth by the
means of mergers and acquisitions or by forming strategic alliances. Mergers occur when
two separate companies join together to form a new venture whereas, acquisitions are the
transfer of the ownership of one company by other. Example: “The acquisition of
LinkedIn Corporation by Microsoft Corporation in 2016” (Galeja, 2019). A strategic
alliance is a mutual agreement or collaboration between independent companies to share
their resources to achieve a common objective. The forms in which strategic alliances
exist are joint ventures, franchising, and consortia. Example: “In June 2012, BMW and
Toyota signed a memorandum of strategic collaboration” (Nkomo, 2019).

b) Business expansion has potential benefits and drawbacks. Some owners are
reluctant to take the risk of growing the business and choose to stay small. Using
materials, you studied in this module, outline some of the key advantages and
drawbacks of the growth strategies you outlined in question (a) above.
 Internal growth strategies such as expanding product lines through diversification can
have advantages such as being inexpensive in nature when compared to mergers and
acquisitions. In the diversification process, the business is familiar with its product line
and operational strategies which is less risky as it requires fewer resources. Internal
growth strategy also ensures better control and coordination within the business as there
is no dilution of control due to mutual agreement of objectives or shared resources.
Diversification involves research and development which provides patent rights this helps
to eradicate rival firms to compete, when there is less competition this mechanism allows
a business to increase pricing power and gain market shares. However internal growth
strategies have drawbacks such as limited scope for expansion and growth, as the
business may expand within the prevailing market or pitch its offering to an existing
customer base.

External growth strategies such as mergers and acquisitions bring resources and
technologies together which allows businesses to expand overseas and improve their
market share. Strategic alliances provide a platform to access new markets and share
complementary capabilities to be productive (economies of scale). Though, external
growth strategies involve huge costs and regulatory approvals in general which causes
delays. Moreover, Mergers and acquisitions affect the corporate culture this occurs due to
the mixture of different styles of management practice by the companies. Strategic
alliances often lead to a conflict of interests, increase bureaucracy, and the threat of
exploitation.

c) Explain the possible advantages and disadvantages of big mergers and acquisitions
for consumers, employees, and the wider UK economy?

The objective of big mergers and acquisitions is to improve the economic scale of a
business, reduce costs and generate profits. M&As bring different market expertise and
technology together which leads to increased economies of scale. This external growth
strategy allows access to new customers and provides them with a unique offering by
lowering the price. In some cases, big M&As eradicate competition from the market
which makes them monopoly power where the customers may be charged high prices.
Companies gain quick market share through M&As, which require the needs of
employees. M&As provide job opportunities for employees, this is because big M&As
are likely to have greater financial stability compared to other forms of businesses. Along
with job opportunities, the employees may receive new career advancement opportunities
and work on larger projects as a result of M&As. M&As can create cultural clashes, as
the mergers together bring up a different culture which leads to the employee’s difficulty
in adopting the combined cultural norms. In some cases, an aggressive merger can
incorporate the company’s core values which cuts down the synergies between the
employee and the management and the employees can feel less motivated, stressed, or
monotonous. One of the features of M&As is that they can bring or create more
competitive firms, which can help the economy of the UK compete globally. This will
help M&As enter the international markets, creating a source for foreign investments in
the UK. In some cases, it was found “a negative relationship between the inflation rate
 and the number of M&A for UK firms during the period 1990 to 2008”
(AgyenimBoateng, 2014).

Section B: Macroeconomic Environment of Business

a) With reference to the extract above and the materials you covered in this module,
what are sources of inflation that affect businesses in the UK?

In the above extract, it can be seen that The Consumer Prices Index (CPI) rose by 10.1%,
this extreme rise in CPI indicates higher inflation in the UK economy. This significant
rise in CPI is due to the increase in the prices of goods and services. The main reason
behind this inflation is the political and military interference of Russia’s invading
Ukraine.

One of the sources of inflation in the above extract is due to demand-pull inflation,
Demand-pull inflation occurs when there is an increase in the overall demand for goods
and services this arises when the aggregate demand exceeds the aggregate supply in the
economy causing a shortage of goods and services. Similarly, in the extract, it can be
seen the rising price of food and non-alcoholic beverages. Cost-pull inflation is also
another reason for the source of inflation, Cost-pull inflation occurs when the supply of
goods is limited whereas, the demand for such goods is unchanged. This happens when
there increase in the price of those goods which do not have a suitable alternative. In the
same manner, it can be seen in the above extract that the prices of gas increased within a
period of 12 months by 95% and the prices of electricity rose by 54% which do not have
a perfect substitute available.

As a result of the rise in the living cost, businesses are challenged to charge more for
goods and services the reason for this is because of the vacant jobs and employment
regulations.
 b) Draw relevant AD/AS diagrams to demonstrate the types of inflation you referred to
in question (a) above.

In the above demand-pull inflation graph, the x-axis measures the real GDP, and the y-axis
measures the price level. Demand-pull inflation occurs when there is an increase in the overall
demand for goods and services this arises when the aggregate demand exceeds the aggregate
supply in the economy causing a shortage of goods and services. With the increase or rightward
shift in demand, the new equilibrium level will eventually have a higher price. The reason for the
shift in the demand curve is the change in the real GDP function or change in the AD equation
i.e. AD= C + I + G + (X-M).
In the above cost-pull inflation graph, the x-axis measures the real GDP, and the y-axis measures
the price level. Cost pull inflation occurs due to the rise in the cost of production, natural
calamities, or disturbance in the supply channel. These factors are responsible for the production
delays causing prices to hike up. An increase in the cost of production decreases the quantity that
the firm which causes the supply curve to shift leftwards.
c) Discuss how policymakers can help to reduce the rate of inflation in the UK. Do you
think that the government can bring down inflation to its target rate of 2% and if so,
how?

With the help of The Central Bank of England, the government has targeted an inflation
rate of 2% measured by the Consumer Price Index (CPI). To achieve this challenging
rate. The two policymakers i.e. the UK government and the Central Bank of the UK (The
Bank of England) need to take several actions together to reduce the rate of inflation in
the UK. Firstly, the UK government can use Fiscal policy to reduce the inflation rates,
this can be done by restricting or controlling government expenditure. The other ways
government can control the inflation rate is by increasing taxes and implementing price
caps or price floors, due to which the people will spend less. Additionally, the
government can also enhance the supply-side policy which can be done through
government investments to maintain the supply side by removing entry barriers and
improving market productivity.
Secondly, the Bank of England can control the money supply over the nation. This can be
done with the tool where the Central Bank of the UK can sell their bonds to the UK
government. With the reduction of the money supply, the borrowings get limited which
will encourage the firms and the people for saving purposes. Moreover, The Bank of
England can regulate its interest rates to make borrowing more expensive. Higher interest
rates will have control over the borrowing behavior of the firms and the general public.
The Central Banks can intervene in foreign exchange markets to strengthen the exchange
rates; this is because a stronger exchange rate will make UK’s imports relatively cheaper.
This is will reduce the price of imported goods say raw which will help the firms to lower
the cost of production.
Therefore, the combination of Fiscal and Monetary policy can control the inflationary
pressure in the UK.
References
AgyenimBoateng, X. M., 2014. Home country macroeconomic factors on outward cross-border mergers
and acquisitions: Evidence from the UK. Research in International Business and Finance, Volume 30, pp.
202-216.

Galeja, P., 2019. Mergers and Acquisitions in the ICT market: The case of Microsoft and LinkedIn Corp.

Gao, J., 2021. Analysis of the Diversification strategy of Apple Inc. Academic Journal of Business &
Management, 3(9), pp. 34-39.

Nkomo, T., 2019. Analysis of Toyota Motor Corporation.