3.1.2 business growth Flashcards
(24 cards)
What is organic growth?
Internal growth of a firm, achieved by buying new capital, employing more workers, more investment.
What are the advantages of organic growth?
- low risk, easiest to manage, cheaper than integration
- the firm is able to keep control of the business
What are the disadvantages of organic growth?
-the firms can’t take on new ideas/people
-may become too specialised in niche areas/narrow focus
-may be too slow to achieve growth
-another firm may have a market/asset which the company wants to gain from external growth
What is external growth?
Firms grow by buying out other firms by agreement (mergers) or takeovers (acquisitions).
What are the different types of external growth?
- horizontal integration
- forward/backward vertical integration
- conglomerate integration
What is horizontal integration?
Where firms merge at the same stage of the production process. The firms may produce slightly different products and want to increase their range of products or enter new markets.
What are the advantages of horizontal integration?
- reduced competition and increased market share = higher market power
- economies of scale, lower costs and higher profit margins
- removes risk of being bought out, allows for rationalisation
What are the disadvantages of horizontal integration?
- increased risk for the business if the certain market/narrow focus fails = vulnerable to supply side shocks
- may experience diseconomies of scale
- the share price of the firm being bought may rise = expensive
- clash of cultures = some workers may lose their jobs if roles in the new bigger firm are duplicated
What is backward vertical integration?
One firm buys another firm that is closer to the raw material stage of production eg. a steel maker buying a coal-producing firm
What is forward vertical integration?
One firms buys another firm closer to the customer within the production process eg. a brewery buys a chain of pubs
What are the advantages of vertical integration?
- increased potential for profit
- control over the supply chain, reduced risk
- improved quality of the product going to the consumer = impacts PED
- better access to raw materials
- lower costs = lower consumer prices, higher competitiveness and more sales
What are the disadvantages of vertical integration?
- clash of cultures
- the firm may lack expertise needed to make/sell the product to the end consumer
- diseconomies of scale
What is conglomerate/lateral integration?
When a firm buys another firm in an unrelated business.
What are the advantages of conglomerate integration?
- spreads the risk = profitable areas can cross-subsidise loss-making areas
- different products do well at different stages of the business cycle
- useful for firms if there is no room for growth in their current market
- easier for parts of the firm to expand, finance and new managers easily obtained
What are the disadvantages of conglomerate integration?
- lack of expertise in new areas
- brand might become diluted
What are some of the constraints on business growth?
- size of the market
- access to finance
- owner objectives
- regulation
How does the size of the market prevent business growth?
Markets may be limited to a certain size, so firms may be unable to mass produce. Niche and luxury markets may make it difficult for business to grow.
How does access to finance prevent growth?
Retained profits or loans are usually used to grow the business. If profits are too low or dividends are too high, there may be not enough retained profits to grow. Banks may be unwilling to lend due to high risk, especially in small businesses.
How do owner objectives prevent business growth?
Some owners may want to keep strong control over the firm and don’t want to take on extra risk.
How does government regulation prevent business growth?
Governments may prevent businesses from growing to prevent monopolies. Competition law may prevent mergers from occurring as it is forbidden for a company with over 25% market share to be created.
What is an example of horizontal integration?
Kraft bought Cadbury in 2010 for 11.9 billion, they acquired new brands and gained access to large parts of the European chocolate market
What is an example of backward vertical integration?
Petronas, a petroleum company in Malaysia, acquired Star Energy plc, suppliers of gas storage equipment, in 2008. This allowed Petronas to store and sell gas in the EU.
What is an example of forward vertical integration?
Titanic Brewery acquired five pubs in Staffordshire in 2010
What is an example of conglomerate integration?
Virgin acquired Assura, a primary healthcare provider in 2010
