3.1.2 Business Growth Flashcards
(19 cards)
What is organic growth?
Where firms grow by increasing their output, for instance, through increased investment or more labour.
They may open new stores, increase their range of products etc.
Most growth of firms is organic.
Advantages of organic growth
- Alternatives (intergration) is expensive, high risk and time consuming.
- The firm is able to keep control over their business and expand their consumer base.
Disadvantages of organic growth?
- Sometimes, other markets or assets are unobtainble without intergration.
- Organic growth is also often slow and the results can be diluted over a long term trend - not ideal for directors who want to maximise their wages NOW.
Advantages of horizontal intergration?
- Helps reduce competition as a competitor is taken out and market share rises.
- Firms will be able to specialise and rationalise
- Spread of expertise and technology
What is vertical intergration
The intergration of firms in the same industry but at different stages in the production process.
Advantages of vertical intergration?
- Increased potential for profit as the firm takes the potential profit from a larger part of the chain of production.
- There will be less risks as suppliers do not have to worry about buyers not buying
their goods and buyers do not have to worry about suppliers not supplying the goods. - Can control quality of supply and deliverty easier
- Can restrict competitors (i.e if you merge with their supplier)
What is intergation?
Integration is growth through amalgamation, merger or takeover.
A merger or amalgamation is where two or more firms join under common ownership whilst a takeover is when one firm
buys another.
What are the two types of vertical intergration?
- Forwards - When the firm is moving towards the eventual consumer of a good.
- Backwards - When the merger takes the firm back towards the supplier of a good.
Disadvantages of vertical intergration
Firms may have no expertise in the industry they took over.
What is Horizontal intergration?
This is where firms in the same industry at the same stage of production integrate.
Disadvantages of a horizontal intergration?
The problem is that it will increase risk for the business as if that particular market fails, they have nothing to fall back on and will have invested a lot of money into that area.
They are ‘placing all their eggs in one basket’.
What is Conglomerate intergration>
This is where firms in different industries with no obvious connections integrate.
They can sometimes be linked by common raw materials/technology/outlets.
What are the advantages of conglomerate intergration?
- Avoid the issue of their being no more room for growth in the orginal market.
- Range of goods reduces the risk if one industry fails.
- Finance can be shared and market share can be easily increased in both markets.
What are the disadvantages of Conglomerate intergration?
Firms are going into markets in which they have no expertise.
It can often be damaging for the business.
What are the 4 key constraints to business growth?
- Size of the Market
- Access to finance
- Owner objectives
- Regulation
How is the size of a market a contstraint to business growth?
A market is limited to a certain size and so not all businesses are able to mass produce because their goods would not be bought by consumers.
This can happen no matter how big the market is, and there will always be limits on
growth.
how is lack of access to finance a constraint to business growth?
Firms use two main ways to finance growth: retained profits and loans.
If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow.
Banks may be unwilling to lend firms money, particularly smaller businesses that they see as high risk.
As a result, firms will be unable to grow as they can’t finance it
How are owner objectives a constraint to business growth?
Some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with growth.
How is regulation a constraint to business growth?
In some markets, the government may introduce regulation which prevents businesses from growing.
For instance, competition law, which prevents monopolies, can restrict growth as any merger which creates a company with more than a 25% market share can be forbidden from taking place.
