2.1.2 methods of growth

Question 1

What is organic growth?

Answer 1

This is where firms grow within their own business, using their own resources and capability.

Question 2

What are some examples of how a fir can grow organically? [5]

Answer 2

• Increasing output
• Widening their customer base
• Developing a new product
• Diversifying their range
• Investment in R&D, technology, or production capacity

Question 3

How can a firm grow inorganically?

Answer 3

Through merging, acquiring or taking over another firm.

Question 4

What are the disadvantages of organic growth? [2]

Answer 4

• Is a long term strategy and significantly slower than inorganic growth. Could allow competitors to gain more market power and could also make shareholders unhappy if they want faster growth
• Firms might rely on strength of the market to grow, which can limit how much and how fast they can grow

Question 5

What are the advantages of organic growth? [3]

Answer 5

• Less risky than inorganic growth
• Firms grow by building on their own strengths and using their own funds, meaning they are not building up debt and growth is more sustainable
• Existing shareholders retain their control over the firm, which might reduce conflicts in objectives that are possible when there is a takeover

Question 6

What is vertical integration?

Answer 6

When a firm merges or takes over another firm in the same industry, but a different stage of production.

Question 7

What is forward vertical integration?

Answer 7

When the firm integrates with another firm closer to the consumer, involving taking over a distributor.

For example, a coffee producer might buy the cafe where the coffee is sold.

Question 8

What is backward vertical integration?

Answer 8

When the firm integrates with another firm closer to the producer. This involves gaining control of suppliers.

For example a coffee producer might buy a coffee farm.

Question 9

What are the advantages of vertical integration? [3]

Answer 9

• Firms can increase efficiency, through economies of scale, which lowers costs and prices for consumers
• Firms can gain more control of the market; backwards integration can mean firms control price they pay for supplies and could raise price for other firms
• Firms have more certainty over production, with factors such as quality, quantity and price

Question 10

What are the disadvantages of vertical integration? [2]

Answer 10

• Diseconomies of scale could be considered
• Can create barriers to entry, which could lead to a less efficient market since the firm has little incentive to reduce average costs when market share is high.

Question 11

What is horizontal integration?

Answer 11

Merger of two firms in the same industry and the same stage of production.

For example, if a car manufacturer merges with another car manufacturer.

Question 12

What are the advantages of horizontal integration? [3]

Answer 12

• Firms can grow quickly and increase market share
• Can increase output quickly and take advantage of economies of scale
• Two firms will have expertise in the same industry and so can gain advantage, such as in marketing

Question 13

What are the disadvantages of horizontal integration? [2]

Answer 13

• Increased market share could lead to monopoly power, and so there is potential for market inefficiency
• Could be disagreements in the objectives of the 2 merged firms

Question 14

What is conglomerate integration?

Answer 14

This is combining 2 firms with no common connection.

Question 15

What are the advantages of conglomerate integration? [3]

Answer 15

• Can help both firms become stronger in the market
• Can reach out to a wider customer base
• Advantages of economies of scale, particularly risk bearing

Question 16

What is the risk of conglomerate integration?

Answer 16

Could spread product range too thinly and may not be sufficient focus on each which may reduce quality and increase production costs.