3.1.2 Business Growth

Question 1

What ways do businesses grow?

Answer 1

Organic/Internal Growth
Inorganic/External Growth

Question 2

What is organic growth?

Answer 2

Organic growth refers to firms increasing their output using its own resources rather than merging or acquiring businesses

Question 3

What are the advantages of organic growth?

Answer 3

Less expensive
Business retains full control over decision-making
Less financial risk
Manageable expansion

Question 4

Why does organic growth have low financial risk?

Answer 4

Less financial risk as organic growth is funded by retained profits rather than using debt

Question 5

What is the manageable expansion of organic growth?

Answer 5

It allows for manageable expansion, reducing the risk of overextending resources or capabilities

Question 6

How does organic growth retain full control?

Answer 6

Organic growth retains full control over decision-making avoiding complications that that come with mergers

Question 7

What are the disadvantages of organic growth?

Answer 7

Slower growth process
Limited access to markets
Missed innovation and fresh ideas

Question 8

Why is growth slower with organic growth?

Answer 8

Growth is slower than with mergers or acquisitions which can be a disadvantage in a fast-moving, competitive market

Question 9

Why is there limited access to market or assets with organic growth?

Answer 9

Firms may struggle to access new markets that competitors access through integration

Question 10

Why is there missed innovation and fresh ideas with organic growth?

Answer 10

Relying on internal resources can lead to limit flow of new ideas reducing innovation

Question 11

What is inorganic growth?

Answer 11

Inorganic growth refers to expanding a business by combining with or purchasing another firm

Question 12

What are the types of inorganic growth?

Answer 12

Mergers/Amalgamation
Takeovers

Question 13

What are mergers/amalgamations?

Answer 13

Two firms agree to join together to form one new business

Question 14

What are takeovers?

Answer 14

One firm buys control of another with or without its agreement

Question 15

What are the two types of takeovers?

Answer 15

Acquiring, With Permission
Hostile, Without Permission

Question 16

What is integration?

Answer 16

Integration is a term used to describe how two firms are combined during inorganic growth

Question 17

What are the three types of integration?

Answer 17

Horizontal
Vertical
Conglomerate

Question 18

What is horizontal integration?

Answer 18

Horizontal integration occurs when two companies at the same stage of the production process in the same industry merge

Question 19

What are the advantages of horizontal integration?

Answer 19

Reduces Competition
Economies of Scale
Eliminates Duplication
Access to New Resources
Grows in Familiar Markets

Question 20

How does horizontal integration reduce competition?

Answer 20

Firms gain market power by removing a competitor and increasing their share of the market

Question 21

How does horizontal integration eliminate duplication?

Answer 21

Businesses save costs by combining operations eliminating duplication through rationalisation

Question 22

How does horizontal integration allow firms to grow in a familiar market?

Answer 22

Firms consolidate expertise, strengthening their position in a market they already understand

Question 23

How does horizontal integration allow firms to do economies of scale?

Answer 23

The cost of savings through rationalisation and increase productivity through greater expertise, this is economies of scale

Question 24

What are the disadvantages of horizontal integration?

Answer 24

Increased risk if market fails
Cost and risks of integration
Loss of key staff
Most horizontal mergers fail
Reduced consumer choice

Question 25

Why does horizontal integration lead to greater risk if the market fails?

Answer 25

The firm becomes more exposed to industry risks. If the market declines, the business has no alternative revenue streams

Question 26

Why does horizontal integration lead to reduction in consumer choice?

Answer 26

Integration leads to reduced innovation and consumer choice due to decreased competition

Question 27

Why does horizontal integration lead to expenses and risk?

Answer 27

The process can be complex and expensive making it more risky

Question 28

What is vertical integration?

Answer 28

Vertical integration involves companies at different stages of the supply chain merging

Question 29

What is the difference between backwards and forward integration?

Answer 29

Backward integration refers to merging with a supplier, while forward integration involves acquiring a customer/distributor

Question 30

What are the advantages of vertical integration?

Answer 30

More profits from the supply chain Reduced risk and more stability Control over quality and costs (Backwards) Control over customer access (Forward) Efficiency and technology benefits

Question 31

How does backward integration lead to control over quality and costs?

Answer 31

Backward integration helps firms reduce costs by cutting out intermediaries and controlling input prices and quality

Question 32

How does forward integration lead to control over customer access?

Answer 32

Forward integration ensures reliable outlet for products, improving control over how goods are marketed and sold

Question 33

How does vertical integration lead to efficiency?

Answer 33

It can lead to more efficient logistics and production, since parts of the chain are aligned

Question 34

What are the disadvantages of vertical integration?

Answer 34

Loss of key workers Overpaying for the other firm Management difficulties Poor performance in new area Lack of knowledge in new area

Question 35

How does vertical integration lead to poor performance?

Answer 35

A business may have limited expertise In new parts of the supply chain, leading to inefficiency

Question 36

How does vertical integration lead to overpaying?

Answer 36

The initial costs of acquiring and merging with another company can be high

Question 37

What is conglomerate integration?

Answer 37

Conglomerate integration occurs when businesses in completely unrelated industries merge

Question 38

What are the advantages of conglomerate integration?

Answer 38

Reduces risk Help when there's no growth in current market Easier expansion for each division Opportunity for asset stripping

Question 39

Why does conglomerate integration reduce risk?

Answer 39

It provides risk diversification, if one sector underperforms, others can compensate, improving stability

Question 40

Why does conglomerate integration encourage growth in new markets?

Answer 40

It may allow a business to enter new and profitable markets without starting from scratch

Question 41

Why does conglomerate integration allow for easier expansion in new divisions?

Answer 41

A larger organisation can more easily reallocate resources, such as financing or managerial expertise across divisions

Question 42

Why does conglomerate integration lead to asset stripping?

Answer 42

Companies can buy other companies to sell their assets and raise greater finance for their own expansion

Question 43

What are the disadvantages of conglomerate integration?

Answer 43

Lack of expertise in the new market Asset stripping may harm people and places Causes confusion and poor management

Question 44

How does conglomerate integration lead to confusion form poor management?

Answer 44

Operating in unrelated industries increases complexity and requires board management skills

Question 45

Why does conglomerate integration lead to a lack of expertise in a new market?

Answer 45

Without clear links between firms, integration may offer little long-term value and investor confidence declines

Question 46

How does asset stripping from conglomerate integration harm people?

Answer 46

The selling of assets from bought companies can lead to unemployment

Question 47

What factors constrain business growth?

Answer 47

Size of the market Access to finances Owner objectives Regulation

Question 48

Why does the size of markets limit business growth?

Answer 48

Some markets are naturally limited. Even if firms want to expand, there may not be enough customers to buy more products

Question 49

Why does the access to finance limit business growth?

Answer 49

Growth requires money from retained profits or loans A lack of finance due to low profit or refusal of loans due to lack of collateral limits growth

Question 50

Why do owner objects limit business growth?

Answer 50

Not all business owners want to grow such as for a work-life balance

Question 51

Why do regulations limit growth?

Answer 51

Regulation can impose structural limits Competition laws through regulators blocks inorganic growth preventing market dominance