LS2- Business Growth Flashcards
(20 cards)
1
Q
Organic growth
A
- when successful firms reinvest profits into the business to expand further
- can be a result of successful marketing or diversification
- not growing due to merger or acquisition, but by producing more of the same thing
2
Q
Inorganic growth
A
- merging or acquiring other firms
- merging is as equals but acquiring (takeover) may be hostile
3
Q
Horizontal merger + example
A
- a merger between firms operating in the same industry and at the same stage of the production process
- e.g. takeover of Rover by BMW in 1994
4
Q
Positives of horizontal mergers
A
- firms better placed to tap into significant EoS
- increases market share as less competition
- firms can specialise and rationalise, reduce duplicated areas of the business
5
Q
Disadvantages of horizontal mergers
A
- market share gains may attract attention from regulators, who may implement many types of policies and undergo inspections e.g. may make them have a more environmentally friendly production process
6
Q
Vertical merger + example
A
- backward integration- merging with a firm involved in an earlier part of the production process
- forward integration- merging with a firm that is in a later stage of the production process
- e.g. Tesco $3.7 billion takeover of booker 2017
7
Q
Advantages of vertical merger
A
- greater control over the supply chain so less subject to interruptions in supply
- forward integration secures retail outlets and can restrict access to these outlets for competitors
8
Q
Conglomerate merger + example
A
- the merging of two firms that are operating in quite different markets or industries
- e.g. Unilever and Nestlé
9
Q
Advantages of conglomerate mergers
A
- diversified portfolio of production activities may leave the firm less vulnerable to a recession
- more opportunity for cost savings if firms find synergies in core business functions such as accounting/marketing
- useful for firms where there is no room for growth in the present market
10
Q
Disadvantages of conglomerate mergers
A
- may be managerial diseconomies of scale if management team do not understand all aspects of the new diversified business
11
Q
Why mergers can be unsuccessful
A
- cost of integrating may be underestimated
- computer/production systems not compatible
- cultures may clash
12
Q
Pros of organic growth
A
- lowest risk
- no change in control
- good for worker morale + more job opportunities within the firm
13
Q
Cons of organic growth
A
- tends to be slower
- firm may be unable to grow in their current domestic market
- less scope for innovation as building on knowledge of existing human capital
14
Q
How do firms finance growth?
A
- retained profits
- loans
15
Q
Demerger + example
A
- a business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be dissolved
- e.g. Pepsi demerger with Pizza Hut, KFC and Taco Bell
16
Q
Demerger + example
A
- a business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be dissolved
- e.g. Pepsi demerger with Pizza Hut, KFC and Taco Bell
17
Q
Reasons for demergers
A
- lack of synergies- different parts of company have no real impact on each other and fail to make each other more efficient e.g. managers splitting time between areas which are so different it could lead to DEoS
- value of company/share price- may demerge because value of separate parts > value of whole company combined
- focussed companies- some believe if company and management are focussed on individual markets they become more efficient and successful
18
Q
Demerger impact on business efficiency
A
- more efficiency, innovation -> surviving higher competition
- smaller size of business could lead to loss of EoS, reducing efficiency
19
Q
Demerger impact on consumers
A
- may gain from innovation and efficiency-> better products and lower prices
- loss of EoS may mean poorer prices/quality
20
Q
When may the CMA permit a merger?
A
- if sufficient competition still exists e.g. from online stores or growth of discount stores
