1. Methods of Growth Flashcards
What are some reasons a business would grow?
-to sell more products to make more profit
-to gain control of the market
-to avoid being taken over
-to reduce the risk of business failure
-to remove competitors from the market
-to take advantage of economies of scale
What are the reasons for an organisation to stay small?
-easier to manage
-workers feel they belong
-small firms are flexible - they can change faster than large companies
-problems between workers and managers are usually sorted out quicker
What is a merger?
2 or more businesses agree to join together to create one business
What is a takeover?
one business buys over another one- usually a large successful business taking over a smaller business
What are the different types of integration?
-horizontal integration
-forward vertical integration
-backward vertical integration
-conglomerate/diversification
What are the different types of integration?
-horizontal integration
-forward vertical integration
-backward vertical integration
-conglomerate/diversification
What is horizontal integration?
when 2 firms producing similar goods or services join together
Why do companies merge together?
-reduce competitors
-increase in the range of products you produce
-once merged businesses may receive discounts for buying raw materials in bulk
What is forward vertical integration?
when a firm takes over another which is at a later stage in the production process
What is backward vertical integration?
when a firm takes over another firm at an earlier stage in the production process
Why would a business backward vertical integrate?
-greater control over quality of raw materials and regularity of delivery
-may also be able to restrict supplies to competitors
What is diversification?
when a business diverse into completely different products
Why do companies diversify?
-increases the range of products you sell, gain more customers and make more profit
-spreading your risks, if your original product starts to fail then you have the other one to fall back on
What is a conglomerate merger?
where two businesses merge which have no common business interests
what are the advantages of conglomerate mergers?
-assist the companies to diversify
-spreading/lowering risk
-reduces the risk of failure
What are the disadvantages of conglomerate mergers?
-get too large and cannot operate/ perform as well as they previously did
-conflict between business aims and objectives could arise
Why would a business decide to shrink?
shrinking a business frees up equity/finance and allows a business to concentrate on its core business, or releases finance for growth in other areas or markets
What is de-integration?
when a business cuts back or sells minor areas of their business in order to concentrate on core areas
What is a de-merger?
when a business splits into 2 separate companies to raise cash for investment
What is divestment?
when a business sells its assets or a subsidiary company to raise finance
What is asset stripping?
when a business buys another and then sells off the profitable sections bit by bit, and closes down the loss-making sections
What is contracting out/outsourcing?
when one firm hires another to supply parts or to do part of a job instead of the firm doing it themselves
What are the advantages of contracting out/ outsourcing?
-less equipment, less labour, saving money
-high quality work from greater expertise
-may be cheaper than in-house
-need only to use the service than required
-allows a business to concentrate on core activities
What are the disadvantages of contracting out/outsourcing?
-less control over work
-communication needs to be very clear between both businesses
-may have to share sensitive information
What is management buy-out?
when top managers buy the business they work for from the current owners
What is management buy-in?
when a group of managers from outside the business takes over and runs in
What is management buy-in?
when a group of managers from outside the business takes over and runs in
What are the internal economies?
-Technological Economies
-Financial Economies
-Managerial Economies
-Risk bearing Economies
-Commercial Economies (marketing and bulk buying economies)
What are the external economies?
-infrastructure
-other benefits to the local economy
What is diseconomies of scale?
the disadvantages which arise when a firm becomes too large or when too many industries are crowed into the one area
What are the internal diseconomies?
-poor communication
-loss of efficiency
-loss of business
What are the external diseconomies?
-congestion
-pollution
-damage to the environment
-wasteful competition
