Business growth Flashcards
(20 cards)
What is organic/internal growth
Occurs when a firm increases its size through investment in capital equipment or an increased labour force
What is external growth?
Growth through merger or takeover
What is a merger and a takeover?
Merger: Integration of two or more firms maintaining shared ownership and control
Takeover: The acquisition of one firm by another where control passes to the acquiror
What is horizontal intergration?
The joining of two firms in the same industry at the same stage of production
What is vertical integration, backwards and forwards?
Forward: Involves a firm buying another further down the supply chain
Backwards: Involves a firm buying another back up the supply chain
What is conglomerate intergration?
A merger between two firms producing unrelated products
What is synergy?
When the combined entity resulting from the joining of two or more firms is more valuable than the sum of the component parts
What is asset stripping?
When a predator takes over a target company because it feels that the market price of the target’s assets is higher than its stock market value suggests
What is shareholder value?
Increasing the wealth of shareholders by paying dividends and/or causing the share price to increase
What are the (dis)advantages of organic growth?
Adv:
- Low risk
- Inexpensive
- No shift in culture
Dis:
- Slow
- Short term profit motivated
- Shareholders may be unhappy
What are the (dis)advantages of horizontal integration?
Adv:
- Increased market share
- Higher barriers = dynamic efficiency and supernormal profits
Dis:
- May trigger investigation
- Culture clash
- Diseconomies of scale/dyssynergy
What are the (dis)advantages of forward integration?
Adv:
- Consistency in product distribution ensured
Dis:
- Lack of innovation
- Cost
What are the (dis)advantages of backward integration?
Adv:
- Greater certainty over supplies
- Buy at cost
Dis:
- May trigger regulatory review
What are the (dis)advantages of conglomerate integration?
Adv:
- Risk diversification
- Improve brand image
Dis:
- Lose core focus
- Costly
- Risky
What is a demerger?
When a firm splits into 2 or more independent businesses (due to dyssynergy)
What are the reasons for demergers?
- Avoid diseconomies of scale
- Eliminate culture clash
- Refocus on core activity
- Regulation
What are the advantages of demergers?
Adv:
- Focus on core activities
- Easier to manage
- Market doesn’t like the status quo
What are the (dis)advantages of demergers on businesses?
Adv:
- Higher profits
- Brand restored
Dis:
- Reduced scope for EoS at lower output
What are the (dis)advantages of demergers on workers?
Adv:
- More specialist skills
Dis:
- Less occupationally mobile
What are the (dis)advantages of demergers on consumers?
Adv:
- Lower prices increase consumer surplus
Dis:
- No longer a ‘one stop shop’
- May face higher prices if businesses cannot exploit EoS
