2.1.2 Methods of growth Flashcards
What is organic growth?
This is where firms look to grow by increasing their production through inceasing their levels of productivity and output. Firms may also invest in R&D to improve quality of goods/services produced allowing volume of output to expand increasing sales.
Any form of internal growth
What are advantages of organic growth?
- Often more susutainable form of growth as firms are using their own funds/profits to sustain growth meaning they have greater control.
- Also less risky thank inorganic growth.
- Also means Shareholders are better off as they dont lose ownership in the business because if firms were to inorganically grow through takeovers than ownership becomes more diluted, therefore avoiding divorce of ownership of control.
What are the disadvantages of organic growth?
- Relies on market structure to grow which could be limiting.
- Also can be a slow process of growth when relying on market which may make shareholders unhappy as they want fast growth and high profits in order to benefit from dividends.
- Competitors who are growing through inorganic techniques may be growing at a faster rate causing for market shrae to fall as well as competitiveness
What is backwards vertical integration?
This is when a business takesover a related firm within their supply chain allowing them to take control over their own supply of raw materials. For example if a coffee producer was to buy the coffee farm of a business operating in the primary sector.
What is forwards vertical intergration?
When a producer takes over a business who are closer to the consumers in terms of final selling of the good. For example if the coffee producer was to take over a coffee shop.
What are advantages of backwards vertical integration
In backwards vertical integration it means firms have greater security in their supply chain in terms of quality and price and can also charge competitors higher prices when supplying these raw materials allowing them to gain competitive advantage as costs for competitors now rises.
What are advantages of forwards vertical intergration?
Allows for synergies as the combination of two firms means greater output and chnace of growth therefore likely to lead to higher levels of profits at fast rates.
What is horizontal intergration?
This is where a firm merges with another business which operate in the same market / producing similar goods and services.
What are advantages of horizontal integration ?
Horizontal integration allows for a competitor to be removed as merging of two firms means competition is reduced increasing market share for the mergers.
Also both firms will have expertise in the market therefore can benefit from greater efficiency and synergies as well as economies of scale.
CMA banned the merge proposal between Sainsbury’s and Asda in 2019. Was a £7.2 billion proposal.
What are disadvantages of horizontal intergration?
Could be a clash of culture/disagreements between the firms leading to ineffiency and perhaps diseconomies of scale.
What is conglomerate integration?
This is when a firm will merge/accquire a firm in a totally unrelated market. For example associated british foods owns Primarks.
What are advantages of conglomerate integration?
Conglomerate integration allows for greater secutiry as if firms see falling profits in one market it means they can rely on profits from the other market which they have integrated in which may be booming allowing for risk to be spread greater.
What are disadvantages of conglomerate integration?
Merging with a business in an unrelated market may be difficult as the lack of knowlegde and expertise within that field is likely to cause for slow growth to start with.
Also could take away focus from businesses core objectives.
What are constraints for business growth?
regulation, owner objectives, access to finance.
How may owner objectives constrain business growth?
If owners have other objectives where profit maximisng is not the main objective, and are profit satisficed then this will cause business to not grow.
