Business Growth

Question 1

Internal/Organic Growth

Answer 1

Growth achieved by increasing the levels of the factors of production which helps to improve quality and quantity of output so firm can make more profit

Question 2

Advantages of organic growth

Answer 2

• Firms maintain control
• less expensive time consuming and risky than integration and takeovers

Question 3

Disadvantages of organic growth

Answer 3

• Extremely difficult to access new markets organically especially international.
• Very slow process
• Requires innovation which is harder than intergration
• Less access to capital to grow with

Question 4

What is intergration

Answer 4

A Merger or Takeover

Question 5

What is a merger

Answer 5

When two firms join to be under common ownership

Question 6

What is a takeover

Answer 6

One firm buys another

Question 7

What is an example of backwards vertical integration

Answer 7

Tesco bought Booker for £3.7bn in 2018, who were a wholesaler and logistics businesses

Question 8

Forward Vertical Integration

Answer 8

When a firm takes over a firm further forward in the production process (closer to the consumer)

Question 9

Backwards Vertical integration

Answer 9

When a firm takes over a firm further back in the production process (a supplier)

Question 10

Horizontal integration

Answer 10

Combining firms that are at the same stage of the production in the same industry

Question 11

Advantages of vertical integration

Answer 11

• Increased potential for profit
• better communication between suppliers and producers
• businesses can control price and quality of supplies aswell as making supply very reliable which can increase competition
• suppliers can secure retail outlets which make the most profit minimising competitors retail influence

Question 12

Disadvantages of vertical integration

Answer 12

• Expensive and Risky
• Firms may take over an industry which they have no expertise in
  —> This is why they will aim to keep much of the old staff in a takeover

Question 13

example of horizontal integration

Answer 13

In 2015 AstraZeneca acquired ZS Pharma for $2.7bn which gave access to new compounds and increased market share

Question 14

Advantages of horizontal integration

Answer 14

• reduce competition and increase market share becoming monopoly power
• Firms can specialise and rationalise as they become larger
• less risky as the business will already have an idea of that market
• increase economies of scale

Question 15

disadvantages of horizontal integration

Answer 15

• increases risk for one or both companies
• Expensive

Question 16

Conglomerate Integration

Answer 16

When firms in completely different markets or industries with no obvious connections integrate

Question 17

example of conglomerate integration

Answer 17

unpopular nowadays but in the 60s and 70s General Electric was founded as an lighting business but now does aircraft, water, oil, gas, financial services and healthcare

Question 18

Advantages of conglomerate integration

Answer 18

• Useful if there is no room to grow in a firms current market
• Range of products reduces risk if an one industry fails
• easier for each individual part of the business to expand finance and employees and managers can be easily obtained or transferred between different parts
• diversify to new markets

Question 19

Disadvantages of conglomerate integration

Answer 19

• Firms have zero expertise or knowledge in that industry so is risky
• profit from some parts may be being used to their own detriment to keep another part alive

Question 20

Constraints on Business growth

Answer 20

• hard to access finance as some firms don’t make loads of retained profit and must give large amounts to shareholders, Banks refuse to lend to small businesses
• If the market is smaller niche or luxury one it is harder to grow as there is no opportunity to grow as there isn’t enough demand
• Some owners objectives aren’t focused on growth as they don’t want more risk or work
• some markets have regulations to stop firms growing

Question 21

What is the example of regulation stopping firms growing in the UK

Answer 21

Government limits amount of pharmacies allowed in a certain area and they can only expand by buying others.

Question 22

What is competition law

Answer 22

Prevents monopolies forming by restricting mergers which form companies with over 25% market share

Question 23

What is a demerger

Answer 23

A business in broken into two or more components to operate separately, be dissolved or be sold

Question 24

example of a demerger

Answer 24

1997 Pepsi demerger with its Pizza Hut, KFC and Taco Bell restaurants to focus on Coca Cola competition

Question 25

Reasons for demergers

Answer 25

• Lack of synergy between business components resulting in diseconomies of scale
• some components may be a significant amount more profitable than others so will demerge to focus fully on them and get rid of components bringing them down
• Avoid competition Authorities
• Some believe that focusing fully on one component can make it more efficient and successful and then profitable than having multiple, as managers skills and time and knowledge are more concentrated

Question 26

Impact of demergers on the employees

Answer 26

Results in unemployment for the standard worker in some cases, may also end up in promotion for some as more managerial roles are needed

Question 27

Impact of demergers on businesses

Answer 27

more concentrated business will make it more efficient and more innovative so can compete more, smaller business could lose its economies of scale

Question 28

Impact of demergers on consumers

Answer 28

May gain better quality products at cheaper prices, but loss of economies of scale can be detrimental to customers in raising prices