2.1.2 Methods of Growth Flashcards
Organic growth
Means simply, expansion of the business, without takeovers or mergers
Inorganic growth
Occurs when there is a takeover or merger. Quicker but can be less successful than organic growth
Merger
why is it not a takeover
Joining together of two/more firms into a single business with the approval of the shareholders/management → two firms retain their separate identities
Takeover
One firm makes a bid for another ans secures over 50% of shares → firm taken over is swallowed up by another one, takeovers acquisitions
Synergy
Two businesses are combined and together are able to increase efficiency and grow faster/make more profit than they could have if they had stayed separate
Horizontal integration
Two business in the same industry have joined together
Vertical integration
Merging two businesses in the same industry, but at different stages of production or the supply chain
Conglomerate integration
Two businesses with nothing in common join together
business investments
what are they and why are they important for a business
- Directed at equipment, research and development, marketing, human resources
- End result should be to increase productive capacity and efficiency of business
organic growth
what is it and how is it achieved
- Firm grows from within using its own resources
- It does not take over/merge with other businesses
- Growth comes simply by expanding output and sales
- Can be done by finding new markets abroad, launching new products, growing a customer base through marketing and investment in new capital/tech
inorganic growth
- The firms grows by joining with another firm → merger or takeover
- Inorganic growth combined with organic growth can lead to whole new industries becoming oligopolies (global?)
- Backward, forward, horizontal, lateral, conglomerate
takeovers (2 types)
- Friendly takeovers = taken over by agreement
- Hostile takeovers = resisted by directors, managers, shareholders, employees → ultimately shareholders decide
mergers and acquisition
advantages
- Can help the business compete better
- Leads to greater efficiency and enhanced market power
- Additional advantage may be diversification: falling sales for any one product will have less impact on the business as a whole (risk)
- Benefits: Entering new markets, economies of scale, increased profitabilty/turnover, synergy, brands and patents, balancing investments
increasing efficiency through inorganic growth
- Economies of scale = falling average costs if they merge/acquire and become bigger → especially if both businesses have production facilities or departments too small to reap the economies of scale
- Sharing overheads = one new business doesnt need two head offices etc, saving money → rationalisation (can lead to redundancy)
enhancing market power
- Reducing competition → new bigger business wil have more power to adjust pricing, output and marketing tactics
- Parent company may want to take over market of target company
- In the interests of efficiency, the target company’s production facilities make some employees redundant and redeploy employees with valuable skills → this removes competition for the parent company
- Acquisitions allow effortless access to assets, patents and brand names → patents are valuable
Parent company may want a market segment that it itself cannot reach → customers - Defensive reasons → smaller reasons in an industry may join together to stand up to a larger market leader
synergy
complementary strengths and diversification
- 2+2=5
- The combined outcome is better than the sum of their existing sales and profits → weaker businesses get stronger
- Complementary strengths: different businesses with different strengths together make a good whole
- Diversification: businesses from different markets help spread risk when joined together → problems in one field will not affect the whole business
benefits of a merger
- Sustained stats
- Greater assets
- Fast growth
- Similar industry → eliminated competition
- Economies of scale: esp for production companies, can use more raw materials
additional - Embraced additional cultural values
negatives of a merger
- Poor communication
- Culture clash
- Lack of energy
- Culture may restrict creativity
- Govt regulation, risk increased
forward vertical integration
manifacturing in moving into the distribution process
backward vertical integration
adding an earlier stage in the supply chain → business looks to produce inputs such as components or raw materials that were previously bought from suppliers
lateral integration
horizontal
Lateral: similar to horizontal, a takeover of a firm in a related field
horizontal/vert int and growth
- Horizontal integration will always include a merger/takeover.
- Vertical I can be part of an organic growth but it is slower than M&A, especially if the motive is take control of distribution
- Many M&A projects fail to fulfill expectations → synergy is elusive, power thirst leads to a hard to manage, inefficient business
benefits of a takeover
- Increased market share
- Acquire new skills
- Access economies of scale
- Secure better distribution
- Acquire intangible assets (brands, patents, trade marks)
- Spread risks by diversifying
- Overcome barriers to entry to target markets
- Defend itself against a takeover threat
- Enter new segments of an existing market
- Eliminate competition
why are takeovers better than organic growth
- business/-management lacks expertise/resources to develop organically
- Speed of growth is a high priority
- Competitors enjoy significant advantages that are hard to overcome other than acquiring them
why are takeovers not better than organic growth
- High costs involved, takeover price high
- Problems of valuation
- Upset customers and suppliers due to disruption
- Problems of integration - resistance from employees
- Incompatibility of management styles, structures and culture
- Questionable motives
why do takeovers fail
communication, inefficiency, price
- Price paid for takeover was too high
- Lack of decisive change management in the early stages
The takeover was mishandled - Cultural incompatitbility between the two businesses
- Poor communication from management to employees and other stakeholders
- Loss of key personnel and customers post acquisition
- Competitors take the opportunity to gain market share whilst the takeover target is being integrated
