Business growth

Question 1

Why do businesses grow

Answer 1

Businesses want to grow because growth helps reduce their average costs in the long-run, help develop increased market share, and helps them produce and sell to new markets.

Question 2

Internal growth

Answer 2

This occurs when a business expands its existing operations. For example, when a fast food chain opens a new branch in another country. This is a slow means of growth but easier to manage than external growth.

Question 3

External growth

Answer 3

This is when a business takes over or merges with another business. It is sometimes called integration as one firm is ‘integrated’ into the other.

Question 4

Merger

Answer 4

A merger is when the owner of two businesses agree to join their firms together to make one business.

Question 5

Takeover

Answer 5

A takeover occurs when one business buys out the owners of another business , which then becomes a part of the ‘predator’ business.

Question 6

Horizontal merger/integration

Answer 6

This is when one firm merges with or takes over another one in the same industry at the same stage of production. For example, when a firm that manufactures furniture merges with another firm that also manufacturers furniture.

Question 7

Horizontal merger/integration benefits

Answer 7

Benefits:
Reduces number of competitors in the market, since two firms become one.

Opportunities of economies of scale.

Merging will allow the businesses to have a bigger share of the total market.

Question 8

Vertical merger/integration

Answer 8

This is when one firm merges with or takes over another firm in the same industry but at a different stage of production.

Question 9

How many types of vertical merger/integration are there?

Answer 9

2

Question 10

Backward vertical integration

Answer 10

Backward vertical integration: When one firm merges with or takes over another firm in the same industry but at a stage of production that is behind the ‘predator’ firm. For example, when a firm that manufactures furniture merges with a firm that supplies wood for manufacturing furniture.

Question 11

Backward vertical integration benefits

Answer 11

Benefits:
Merger gives assured supply of essential components.
The profit margin of the supplying firm is now absorbed by the expanded form.
The supplying firm can be prevented from supplying to competitors.

Question 12

Forward vertical integration

Answer 12

When one firm merges with or takes over another firm in the same industry but at a stage of production that is ahead of the ‘predator’ firm. For example, when a firm that manufactures furniture merges with a furniture retail store.

Question 13

Forward vertical integration benefits

Answer 13

Benefits:
Merger gives an assured outlet for their product.
The profit margin of the retailer is now absorbed by the expanded form.
The retailer can be prevented from selling the goods of competitors.

Question 14

Conglomerate merger/integration

Answer 14

This is when one firm merges with or takes over a firm in a completely different industry. This is also known as ‘diversification’. For example, when a firm that manufactures furniture merges with a firm that produces clothing.

Question 15

Conglomerate merger/integration benefits

Answer 15

Benefits:
Conglomerate integration allows businesses to have activities in more than one country. This allows the firms to spread its risks.
There could be a transfer of ideas between the two businesses even though they are in different industries. This transfer of ideas could help improve the quality and demand for the two products.

Question 16

Drawbacks of growth

Answer 16

Difficult to control staff: as a business grows, the business organisation in terms of departments and divisions will grow, along with the number of employees, making it harder to control, co-ordinate and communicate with everyone
Lack of funds: growth requires a lot of capital.
Lack of expertise: growth is a long and difficult process that will require people with expertise in the field to manage and coordinate activities
Diseconomies of scale: this is the term used to describe how average costs of a firm tends to increase as it grows beyond a point, reducing profitability. This is explored more deeply in a later section

Question 17

Why businesses stay small

Answer 17

Type of industry: some firms remain small due to the industry they operate in. Examples of these are hairdressers, car repairs, catering, etc, which give personal services and therefore cannot grow.
Market size: if the firm operates in areas where the total number of customers is small, such as in rural areas, there is no need for the firm to grow and thus stays small.
Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of them prefer keeping their businesses small and having a personal contact with all of their employees and customers, having flexibility in controlling and running the business, having more control over decision-making, and to keep it less stressful.