Topic 4 - Methods of Growth

Question 1

Internal Growth

Answer 1

Businesses growing on their own without getting involved with any other businesses.

Methods:
- Launching new products/services - can meet the needs of different market segments.
- Opening new branches - can cater for more products/services, customers and staff.
- E-commerce - can trade 24/7 to a global market.
- Hiring more staff - improves ability to make sales, make better decisions and develop more products.
- Increasing production capacity - can invest in new technologies to make more products.

Question 2

Diversification

Answer 2

Launching products across different markets.

Advantages:
- Can target different markets
- Spreads risk

Disadvantages:
- Requires numerous resources.

Question 3

Horizontal Integration

Answer 3

Two businesses from the same sector of industry become one business.

Advantages:
- Can dominate the market as competition is reduced.
- Increases market share.
- Can raise prices as competition is reduced.
- Economies of scale

Disadvantages:
- May breach EU competition regulations.
- Quality may suffer due to lack of competition.
- Customers have to pay higher prices for the same goods.

Question 4

Forward vertical Integration

Answer 4

Taking over a business in a later sector of industry.

Advantages:
- Can control supply of goods.
- Can increase profits by adding value itself.

Disadvantages:
- May incapable of managing new activities efficiently.
- Monopolising markets may have legal repercussions.
- May adversely affect core activities.

Question 5

Backward Vertical Integration

Answer 5

Taking over a business in a later sector of industry.

Advantages :
- Guaranteed and timely supply of inventory.
- No need to pay suppliers marked up prices.
- Quality of supplies can be strictly controlled.

Disadvantages:
- Monopolising markets may have legal repercussions.
- May be incapable of managing new activities efficiently.
- May adversely affect core activities.

Question 6

Lateral Integration

Answer 6

Two businesses from the same sector of industry but don’t provide the same product become one business.

Advantages:
- New products can compliment existing ones.
- Can target new markets.

Disadvantages:
- May adversely affect core activities.
- Lack of knowledge in a slightly different market may affect performance of products.

Question 7

Conglomerate Integration

Answer 7

Two businesses from completely different markets become one business.

Advantages:
- Can spread risk
- Can overcome seasonal fluctuations
- Larger and more financially secure
- Gains customers and sales of other business
- Gains assets of other business

Disadvantages:
- May become too large and inefficient to manage
- May have no knowledge in market so may fail
- May lose focus on core activities

Question 8

Takeover

Answer 8

One business buys another business.

Advantages:
- Gains market share of acquired business
- Spreads risk
- Economies of scale
- Gains assets of acquired business
- Reduces competition

Disadvantages:
- Expensive
- Change of name can put off customers
- Higher prices for customers
- Can lead to job losses in the taken-over business

Question 9

Merger

Answer 9

Two businesses agree to become one organisation.

Advantages:
- Jobs are likely to be spared in both businesses
- Economies of scale
- Increases market share
- Increases resources available
- Each business can bring different areas of expertise

Disadvantages:
- Higher prices for customers
- Marketing campaigns to inform customers of changes can be expensive
- Customers may dislike changes

Question 10

Retained Profits

Answer 10

Profits made by the organisation that aren’t given to shareholders and are kept in the business to fund growth.

Question 11

Divestment

Answer 11

Selling of part of an organisation, such as a subsidiary company or a brand.

Question 12

Deintegration

Answer 12

Selling of part of the supply chain that a business owns.

Advantages:
- Can focus on core activities
- Increased choice in vertical chain as the business can look for supplies or customers outside its organisation

Disadvantages:
- Has to pay marked up prices for supplies
- Competitors could acquire deintegrated components and take control of the supply chain

Question 13

Asset Stripping

Answer 13

Taking over another company with the intent to sell its assets for profit.

Question 14

De-merger

Answer 14

A single business splits into two or more separate components.

Advantages:
- Can focus on core activities
- Can operate efficiently
- Can grow

Disadvantages:
- May put off customers
- Expensive

Question 15

Management Buy-out/Buy-in

Answer 15

Buy-out is when the management of a business buy the company they work for.

Buy-in is when the management of another business takes over the business.

Question 16

Outsourcing

Answer 16

An organisation arranges for another business to carry out certain activities for them.

Advantages:
- Less labour and equipment is required
- Business can concentrate on what it is good at
- Outsourced work is high quality as the business has specialist staff and equipment
- Can use the service when it is required which saves costs on idle staff and machinery

Disadvantages:
- Less control over outsourced work
- Communication needs to be clear to ensure needs are met
- Expensive
- May have to share sensitive information