Micro 2 - How Businesses Grow

Question 1

Why might the organic growth of a firm encounter limits?

Answer 1

Market is too saturated already. Firm can only grow at the expense of other firms and they may be strong enough to hold on to their own market share .This would mean the firm has to diversify.

Question 2

Why is diversification risky and what does the risk depend on?

Answer 2

Risky because it moves the firm into a market they are not familiar with that may already have fierce competitors. Would depend on the quality of management and information gaps.

Question 3

What is external growth?

Answer 3

When a firm merges with or acquires another firm

Question 4

What are the three types of merger?

Answer 4

1. Horizontal mergers, businesses that are similar (decreases competition for firms)
2. Vertical mergers, forward and backward. Forward integration means merging with a company more forward in the production process and backwards is opposite.
3. Conglomerate merger, merging of two firms in different markets

Question 5

Advantages of vertical integration

Answer 5

Allows for rationalisation in production process. If a firms component supplier is a part of the firm rather than an independent operator it can improve reliability of supply (just in time supply)

Question 6

Advantages of conglomerate merger

Answer 6

Reduces the risk taken by firms. Different markets have different market fluctuations. Being in different markets can even out a firms activity overall. However these mergers are not as efficient as integrating a firm from another market requires people with new skills and specialisms.

Question 7

Advantages and disadvantages of organic growth

Answer 7

Advantages:
- control of firm remains unchanged
- firm can build on existing strengths
- good for worker morale as opportunities within firm will increase

Disadvantages:
- organic growth is usually slow

Question 8

Advantages of inorganic growth

Answer 8

1. Horizontal merger - instant access to economies of scale, increased market share (therefore increased market power?)
2. Vertical merger - greater control over supply chain, leading to less interruptions in supply
3. Conglomerate merger - diversified portfolio therefore less vulnerable to recession

Question 9

Disadvantages of inorganic growth

Answer 9

1. Horizontal merger - increased market share attracts attention of the regulator
2. Conglomerate merger - managerial disputes and information gaps as the two companies will not be familiar with each other
3. General office cultures might clash
4. Computer systems hard to merge
5. Staff cuts