3.1.2 Flashcards
(18 cards)
what is organic growth (definition) and how do firms achieve (ways)?
organic growth is when a firm expands current operations rather than relying on mergers/ takeovers.
some ways they do this is by
* increased marketing to expand consumer base
* developing new products
* investment into capital to expand current porduction capacity
* Finding new markets for example by exporting into emerging countries (india and south africa)
what is external growth and what the 4 types?
growth through mergers/ takeovers
* backwards vertical
* forwards vertical
* horizontal
* conglomerate
define horizontal integration
is between two businesses in the same industry at the same stage of production
what are the advantages of horizontal integration?
- Exploit internal economies of scale (purchasing & financial), decreasing LRAC.
- Cost savings from the rationalization of the business – however, this often this involves heavy job losses.
- Potential to secure revenue synergies by creating and selling a wider range of products - (i.e. diversification) – this creates opportunities for a larger business to benefit from economies of scope.
- Reduces competition by removing key rivals – this increases market share and lifts a firm’s long run pricing power.
- Buying an existing and well-known brand can be cheaper in the long-run than organically growing a brand – this can then make entry barriers higher for potential rivals and lead to higher long-run monopoly profits.
what are disadvanatges of horizontal integration?
- Risk of diseconomies of scale from the enlarged businesses especially if there are clashes of management style and culture, and wider problems with integrating businesses that operate in very different ways
- Reduced flexibility– the addition of more personnel and processes means the need for more transparency and therefore, more accountability and red tape which can slow down the rate of innovation / getting new products to market
- Mergers risk destroying shareholder value rather than creating it: This often happens because the synergies never materialize despite the potential benefits of the horizontal integration. Most large-scale mergers fail to achieve the gains in shareholder value that were forecast before it happened
- Risk of attracting investigation from the competition authorities who might be worried that a horizontal merger might lead to a substantial lessening of competition in a market which could then lead to a fall in consumer welfare. A horizontal merger such as Sainsbury and Asda can be blocked on competition grounds.
define vertical integration
Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain.
what is the difference between forwards and backwards vertical integration?
- forwards integrates closer to consumers
- backwards integrates closer to raw materials in the supply chain
what are the advatantages of vertical integration?
backwards
* greater control of supply chain, taking profits away from middle men, reducing overall unit costs
* control of quality of raw materials
* improves access to raw materials at the expense of rivals who may now have to pay more for them
forwards
* knowing more about consumer choice and needs
* better control over retail distribution: improved customer experience, less logistic issues ect
what is conglomerate integration?
when two firms in unrelated industries merge?
what are the disadvanatges of vertical integration for a firm?
- High costs for maintaining production facilities
- Reduced flexibility to switch to cheaper or higher-quality suppliers
- increased complexity and so more communication issues, disecoomies of scale
- Potential for increased risk if the integrated supply chain faces challenges.
- Regulatory scrutiny and antitrust concerns
what are advantages of organic growth?
- Lower Financial Risk
Organic growth typically requires less upfront capital compared to acquisitions or mergers.
Firms avoid taking on excessive debt or diluting equity, which reduces financial leverage and the risk of insolvency.
Example: A company investing in R&D to develop new products avoids the high costs and integration risks associated with acquiring another firm. - no debt obligations
Internal financing eliminates the need to borrow money, which means the firm avoids interest payments and repayment obligations.
This reduces financial risk, as the firm is not exposed to the pressure of meeting debt covenants or the risk of default.
Example: A manufacturing company using retained earnings to purchase new machinery avoids the burden of loan repayments during economic downturns.
what are the disadvantages of organic growth?
- Slower growth compared to other strategies.
- Limited in terms of rapid market capture.
- Requires time and patience to see substantial results.
what are constaints on market growth?
- size of the market
- access to finance
- owner objectives
- regulation (CMA) blocking mergers
why is gaining acess to finance a constraint?
(SMEs) run up against finance constraints including limited access to loans and risks and costs of raising equity in capital markets.
In the aftermath of the Global Financial Crisis, commercial banks are more risk-averse when it comes to lending to businesses. In the UK, many small and medium sized enterprises complain that they cannot access loan finance at affordable interest rates. Commercial banks may charge a “risk premium” when lending to SMEs.
how is size of the market a constraint to business growth?
Businesses achieving success in local, or niche markets may find limits to scalability. There is simply not enough regular consumer spending. Other businesses successfully leverage their brand image to enter new markets.
Niche markets target smaller groups of consumers, they are often highly profitable because suppliers can charge a premium price but have limited opportunities for economies of scale to be exploited.
how is regulation a constraint on business growth?
- In the UK, the Competition and Markets Authority (CMA) may decide to block a merger
- increased pressure means they may set things like price caps, reducing profits. they encourage lower barriers to entry increasing competition, lower prices and profits in future maybe potentially even a price war.
define diversification
comes under conglomerate
widening of product range outside current areas of specialism
why do firms diversify?
risks are spread across, when one industry faces a difficult time the other can cross subsidise
