3.1.2- Business Growth

Question 1

What are the two main types of growth?

Answer 1

Organic Growth, External Growth

Question 2

What is Organic Growth?

Answer 2

The internal growth of a business which builds on a business’ own capabilities and resources rather than merging or taking over another business.

Question 3

What is External Growth?

Answer 3

A.K.A. Inorganic Growth, Occurs through the acquisition of another company, or a merger with another company, in order to expand market share of capabilities.

Question 4

How can a business use Organic Growth? (4)

Answer 4

• Increasing the current productive capacity through investment or increasing the Q&Q of FoP.
• Develop and launch new products.
• Find new markets and export to different countries.
• Grow a customer base through successful advertising to get people buying and using the product.

Question 5

What are the three types of External Growth?

Answer 5

1. Horizontal Integration
2. Vertical Integration (Forward & Backward)
3. Conglomerate Integration

Question 6

What is Horizontal Integration?

Answer 6

The merging of firms in the same industry, in the same stage of production.

Question 7

What is Vertical Integration?

Answer 7

The merging of firms in the same industry, at a different stage of production.

Question 8

What is Forward Vertical Integration?

Answer 8

Supplier merging with buyer. ➡️

Question 9

What is Backward Vertical Integration?

Answer 9

Buyer merging with Supplier. ⬅️

Question 10

What is Conglomerate Integration?

Answer 10

The merging of firms with no common interest.

Question 11

What are advantages of Organic Growth? (4)

Answer 11

• Sustainable and controlled expansion
• Lower financial risk as it relies on internal resources
• Builds on existing strengths and expertise
• A lot easier that organising external growth

Question 12

What are disadvantages of Organic Growth? (4)

Answer 12

• Slower growth compared to other strategies
• Limited in terms of rapid market capture
• Required time and patience to see substantial results
• Another firm may have a market or an asset that would be difficult or impossible to gain through organic growth

Question 13

What are advantages of Horizontal Integration? (4)

Answer 13

• Rapid market share expansion
• Elimination of competitors
• Firms will be able to specialise and rationalise, reducing the areas of the business which are duplicated
• The business is able to grow in a market where it already has expertise, making them more likely to be successful

Question 14

What are disadvantages of Horizontal Integration? (4)

Answer 14

• Increased risk for the business if that market fails, as they have nothing to fall back on
• Integration challenges, such as cultural differences
• Regulatory hurdles and antitrust concerns
• May divert management’s attentions from core operations

Question 15

What are advantages of Vertical Integration? (4)

Answer 15

• Cost efficiencies through elimination of middlemen
• Less risk, as suppliers do not have to worry about buyers not buying their goods (and vice versa)
• With backward integration, firms can control the quality of supplies, and ensure delivery is reliable at a good price, making them more competitive
• Forward integration can restrict competitors’ access to retail outlets

Question 16

What are advantages of Conglomerate Integration? (4)

Answer 16

• Reduced risk for firms if a whole industry fails as they have other parts of the business
• Easier for each individual part of the business to expand as finance can be obtained more easily
• Capitalising on unrelated opportunities
• Potential for higher returns in diverse markets

Question 17

What are the effects of constrained market size on firms? (3)

Answer 17

• Limited opportunities for business expansion- issues with scalability and economies of scale
• Larger markets gain unequal opportunities for innovation and selling
• Larger markets still have a limit to growth (may have to go international)

Question 18

What are the main ways of financing business growth? (2)

Answer 18

• Retained profits
• Loans

Question 19

What do Large to Medium firms use to finance growth?

Answer 19

Equity funding

Question 20

What do Private Limited Companies do to finance growth?

Answer 20

Equity funding- sell shares directly to investors

Question 21

What do Public Limited Companies do to finance growth?

Answer 21

Equity funding- sell shares second-hand through stock exchanges (e.g. London or AIM)

Question 22

What are possible issues with financing? (4)

Answer 22

• Banks have been more risk averse since the global financial crisis and may not be willing to give loans to smaller firms (Banks may charge a ‘risk premium’)
• If shareholders receive too much, there may be reduced retained profits to reinvest
• Cash-flow issues, such as late payments from customers, extended payment terms with suppliers, or changes in sales seasonally
• Excessive debt

Question 23

What kinds of objectives can owners have? (4)

Answer 23

• Sustainability and stability of the firm
• Corporate Social Responsibility- Philanthropy, reducing net welfare loss
• Profit Maximisation
• Standard of Living

Question 24

Why may owners not want to grow their business? (4)

Answer 24

• More risk of business failure
• Entails more work
• Satisfied with standard of living
• Philanthropic rather than Capitalistic

Question 25

What effects does regulation have on business growth?

Answer 25

- Limits the number of firms in an area - Regulatory Compliance Costs increases costs of production - Excessive tax (e.g. corp tax) could discourage firms from earning above a certain level of profit - Firms that sell demerit goods would be burdened by age restrictions, indirect taxes, and minimum pricing

Question 26

What arises as a result of regulation?

Answer 26

A conflict between economic activity and social welfare.

Question 27

What is an examples of regulatory compliance costs?

Answer 27

Auto-enrolment of staff into pension schemes

Question 28

What does the Competition and Markets Authority do?

Answer 28

Aims to maximise the welfare of all economic agents in a market by promoting fair competition and tackling unfair practices such as monopolies. It prevents mergers which create firms with more than 25% market share.

Question 29

What is Corporate Social Responsibility?

Answer 29

When a business considers not only profit maximisation, but also ethical, social and environmental effects of their business, and operates with stakeholders to leave a positive impact on society and a reduction in net welfare loss.