topic 4 - growth

Question 1

state the 7 methods of growth

Answer 1

• internal/organic growth
• diversifcation
• horizontal integration
• forward vertical integration
• backward vertical integration
• lateral integration
• conglomerate integration

Question 2

describe internal/organic growth

Answer 2

this means businesses deciding to grow on their own without getting involved with other organisations.

Question 3

describe the internal/organic growth methods

Answer 3

launching new products/services - businesses can meet the needs of different market segments, especially if they diversify (eg launch new products into different markets from their current ones or export existing products abroad.
opening new branches or expanding existing branches - a business can reach new markets by opening up in new locations. It can also expand existing premises to cater for more products/staff and more customers, make more sales.
introducing e-commerce - by selling online, a business can trade 24/7 to a globel market.
hiring more staff - increasing the number of will improve the business’s ability to make sales, make better decisions and develop more products.
increasing production capacity - businesses can invest in new technology to make more products themselves.

Question 4

advantages of internal/organic growth

Answer 4

• no loss of control to outsiders as growth is internal.
• hiring more staff could bring more ideas to the business.
• investing in new equipment will increase production capacity.

Question 5

describe diversification

Answer 5

this is when products are launched across different markets, for example, Samsung sell mobile phones, tablets and TVs as well as refridgerators and washing machines.

Question 6

describe horizontal integration

Answer 6

horizontal integration occurs when two businesses from the same sector of industry become one business.

Question 7

advantages of horizontal integration

Answer 7

• the new, larger business can dominate the market as competition will be vastly reduced.
• the new business can benefit from economies of scale, eg buying in bulk to reduce prices.
• due to recued competition, the new larger business can raise prices, increasing profits.

Question 8

disadvantages of horizontal integration

Answer 8

• the merger/takeover may breach EU competition rules.
• quality may suffer due to lack of competition.
• customers may have to pay higher prices for the same goods.

Question 9

describe forward vertical integration

Answer 9

this is when a business takes over or merges with a business in a later sector of industry, often a distributor. An example would be a manufacturer of mobile phones such as HTC taking over a mobile phone shop such as Carphone Warehouse.

Question 10

describe backward vertical integration

Answer 10

this is when a business takes over or merges with a business in an earlier sector of industry, in other words, they take over their supplier. An example would be a coffee bean company, such as Starbucks, taking over a coffee bean plantation.

Question 11

advantages of forward vertical integration

Answer 11

• the business can control supply of its products and could decide to not supply to competition.
• can increase profits by ‘cutting out the middle man’ and adding value itself.

Question 12

advantages of backward vertical integration

Answer 12

• guaranteed and timely supply of inventory (stock).
• no need to pay a supplier its marked-up prices so inventory is cheaper.
• quality of supplies can be strictly controlled.

Question 13

disadvantages of backward and forward vertical integration

Answer 13

• company may be incapable of managing new activities efficiently, meaning higher costs.
• focusing on new activities can adversly affect core activities.
• monopolising markets may have legal repercussions.

Question 14

describe lateral integration

Answer 14

this is when a business aquires or merges with a business that is in the same industry but does not provide the exact same product. In other words, the two businesses are not in direct competition with eachother. An example would be if Greggs bought a wedding cake bakery.

Question 15

advantages for lateral integration

Answer 15

• the business can target new markets abd therefore increase sales.
• new products can complement existing ones, eg if a suit company bought a shirt maker, both could then be sold as a complete outfit for a customer to wear.

Question 16

disadvantages for lateral integration

Answer 16

• the lack of knowledge in a slighly different market may affect the performance of the products.
• it may adversly affect core activities.

Question 17

describe conglomerate integration

Answer 17

this occurs when businesses in different markets join together; in other words, a merger of businesses whose activities are totally unrelated.

Question 18

advantages of conglomerate integration

Answer 18

• the business can spread risk. If one market fails, the losses can be compensated for by profits in another.
• it can overcome seasonal fluctuations in their markets and have more consistent year-round sales.
• the business is larger and therefore more financially secure.
• the buyer aquires the assets of the other company.
• the business gains the customers and sales of the aquired business.

Question 19

disadvantages of conglomerate integration

Answer 19

• one business may take on another in a market they know nothing about and this may cause the new business to fail.
• having too many products across different markets can cause the company to lose focus on core activities, impacting on other products.
• the business may bcome too large and inefficient to manage.

Question 20

describe a takeover

Answer 20

A takeover involves one business (usually larger) buying another (usually smaller) business. This can often be hostile and comes as a result of the smaller business struggling financially and the larger business exploiting the situation.

Question 21

advantages of a takeover

Answer 21

• the buying business gains the market share and resources of the taken-over business.
• risk of failure can be spread.
• economies of scale can be achieved.
• competition is reduced, which will increase sales.

Question 22

disadvantages of a takeover

Answer 22

• integration can lead to job losses in the taken-over business as the buying business wants its own management and employees.
• if the buying business moves the headquarters or production to its home country/area, this can have a bad effect on the taken-over business’s local economy.
• integration can be bad for customers as less competition means higher prices.
• a change of name can put off loyal customers of the taken-over business.
• it can be expensive to acquire another business.

Question 23

describe a merger

Answer 23

this involves two businesses agreeing to join forces and become one organisation. This is often friendlier than a takeover and can result in a new name and logo for the new, merged organisation.

Question 24

advantages of a merger

Answer 24

• market share and resources are shared which can spread the risk of failure and increase profits.
• economies of scale can be achieved.
• each business can bring different areas of expertise to the merger.
• unlike a takeover, jobs are more likely to be spared in both businesses.
• can overcome barriers to entering a market, such as strong competition.

Question 25

disadvantages of a merger

Answer 25

- customers may dislike the changes a merger may bring, eg new logo, new name etc as the familiarity of the previous businesses are lost. - marketing campaign to inform customers of changes can be expensive. - can be bad for customers as less competition will mean higher prices.

Question 26

state the 3 other ways to achieve growth

Answer 26

- franchising - becoming a multinational - internal growth (eg new staff, new products).

Question 27

describe retained profits

Answer 27

these are profits made by the business that aren't given to shareholders. They are kept in the business to fund growth, such as developing new products.

Question 28

describe divestment

Answer 28

This is selling off part of an organisation, such as a subsidiary company or one of the companys brands.

Question 29

describe deintegration

Answer 29

this is when a business sells off part of the supply chain that it owns. It occurs when a business has become vertically integrated with either its supplier or customer and eventually realises that it would be better off as a seperate business.

Question 30

advantages if deintegration

Answer 30

- the business can focus on more core activities, for example, if it is a manufacturer it can focus on making rather than farming or selling. - there is increased choice in the 'vertical chain' as the business can now look for supplies or customers outside its organisation.

Question 31

disadvantages if deintegration

Answer 31

- the business will now have to pay marked-up prices for supplies. - competitors could acquire deintegrated components and take control of the supply chain.

Question 32

describe asset stripping

Answer 32

this is taking over another company with intent to sell off its assets for a profit. The individual assets of the organisation, such as factories, retail spaces or fleet, may be more valuable than the organisation as a whole.

Question 33

describe a de-merger

Answer 33

this occurs when a single business splits into two or more seperate components. The de-merged components are still owned by the same organisation as before; however, they are managed independantly of each other.

Question 34

advantages of a de-merger

Answer 34

- each new 'component' can concentrate on its own core activities and growth as a result. - each new component has the best chance to operate efficiently. - de-merged components can be divested which can meet competition regulations, sey by the EU.

Question 35

disadvantages of a de-merger

Answer 35

- customers may be put off by the de-merger and abandon the businesses altogether. - there are significant financial costs involved, for example, in re-branding shop fronts, marketing campaigns to inform customers of the change, and so on.

Question 36

describe management buy-out/buy-in

Answer 36

a buy-out is when the management of a business buy the company they work for. A buy-in is when the management of another business, usually a competitor, takes over the business. In both cases, the management team will feel they have the ideas and industry knowledge to turn the business around and make it successful.

Question 37

describe outsourcing

Answer 37

this is when an organisation arranges for another organisation to carry out certain activities for it, instead of doing it itself. A business could outsource its administration, IT work, printing, legal services, markeing or accountancy.

Question 38

advantages of outsourcing

Answer 38

- outsourcing allows the business to concentrate on doing what is is good at, rather than getting bogged down with additional services. - less labour and equipment is required for outsourced activities, for example, outsourcing printing saves on printers and reprographics staff. - there should be high-quality work from the outsourced business as it should have greater expertise and specialist equipment. - the outsourced business may provide the service cheaper than an in-house departement could as it can benefit from economies of scale, doing the same work for many other businesses. - the business is able to use the service when it is required, so saving costs on idle staff and machinery.

Question 39

disadvantages of outsourcing

Answer 39

- the business will have less control over outsourced work so quality may fall. - communication between the businesses needs to be very clear to make sure exact specifications are met. - the business may have to share sensitive information with the outsourced business that could get into the hands of competitors. - outsourcing could be more expensive than in-house as specialists and expertise comes at a price.