3.1 Business Growth Flashcards
(24 cards)
Organic Growth
Internal growth that is driven by re-invested profits
E.g. Opening a new store
Inorganic Growth
Business growth that occurs as a result of mergers or take overs.
Vertical integration
Taking over a firm in the same industry but a different stage of the production process.
What are the two types of vertical integration.
- Forward = taking over a firm further forward in the supply chain (closer to customer)
- Backward = Taking over a firm further back in the supply chain.
Conglomerate Integration?
The merger of two firms in complete different industries.
Horizontal Integration
Taking over a firm that’s in the same industry and at the same stage of production.
Why do some firms stay small?
- More personal service
- Financial issues
- Niche market
- Avoid managerial diseconomies of scale
divorce of ownership from control
Occurs when the managers of a business are a different group of people from the owners of the business.
What is the difference between private sector and public sector organisations?
- Private sector organisations = organisations that are owned and controlled by private individuals.
- Public sector organisations = organisations that are owned and cotrolled by the government. E.g. BBC
What are the ways in which businesses grow?
- Organic growth
- Forward/backward vertical integration
- Horizontal integration
- Conglomerate integration
What are the advantages of organic growth?
- Manageable pace of growth
- Less risky (financed by profits)
- Avoids diseconomies of scale
What are the negatives of organic growth?
- Can be a slow process
- Doesn’t always benefit from economies of scale
- Access to finance may be limited.
What are the advantages of vertical integration?
- Reduced costs of production due to no middle man.
- Low costs makes firms more competitive
- Greater control of the supply chain, reduces risk due to improved access to reosurces.
- Increased market share
What are the negatives of vertical integration?
- Diseconomies of scale occur as costs increase. (managerial)
- Potential culture clash between firms
- Inefficiencies.
What are the advantages of conglomerate integration?
- Reduced risk of failure
- New opportunities for growth
- Duplicated parts of the new business can be sold for profit.
What are the negatives of conglomerate integration?
- Possible lack of expertise
- Diseconomies of scale
- Job losses
- Reduced productivity
What are the advantages of horizontal integration?
- Rapid increase in market share
- Economies of scale
- Reduced competition
- Higher chance of success due to existing knowledge
- Firm may gain new knowledge
What are the negatives of horizontal integration?
- Duplicated portions of firms
- Managerial diseconomies of scale
- Cultural diseconomies of scale
What are the reasons for de-mergers?
- Decreasing the size of a firm to reduce diseconomies of scale (and increase profits)
- Remove loss making divisions.
What are the impacts of de-mergers on consumers?
- Improved customer service
- Better quality of goods and services
- Lower prices due to efficiencies.
- Improved customer service
- Better quality of goods and services
- Lower prices due to efficiencies.
- Job losses
- More simplicity due to a more narrow focus.
- Smaller workforce means more opportunities for promotion.
What are the impacts of de-mergers on firms?
- Increased efficiency
- Opportunity for a more narrow focus
- Remove loss making portions of the business.
- Lower unit costs
- Removal of cultural differences.
What are the contstraints on business growth?
- Size of the market
- Access to finance
- Owner objectives
- Regulation
What are sunk costs?
Costs a firm faces which can’t be recovered if the firm leaves the industry.
- When sunk costs are high, the market becomes less contestable because the barriers to entry are higher for new firms
- E.g. Redundancy, machinery, remainder of contracts.
