3.1 Business Growth Flashcards
Demergers
A de-merger happens when a firm decides to split into separate firms e.g. by spinning off/ selling parts of their business
Reasons for Demergers
Focus on core business to streamline costs and improve profit margins
Reduce risk of diseconomies of scale
Raise money from asset sales and return to shareholders
Defensive tactic to avoid attention of anti monopoly authorities
Horizontal Integration
When a firm merges with/ takes over another firm in the SAME INDUSTRY at the SAME STAGE IN PRODUCTION i.e. that makes the same product
Advantages of Horizontal Integration
Greater economies of scale
Lower Long Run Average Costs
Increased market influence
Reduction in Competition
Disadvantages of Horizontal Integration
Costs
Increased Workload
Increased Responsibilities
Anti- Trust
Legal Issues/ Creating a monopoly
Vertical BACKWARDS integration
When a firm merges with or buys another firm in the SAME INDUSTRY but FURTHER back in the chain of production
Advantages of Vertical Backwards Integration
Increased control
Guarantees sources of raw materials/ component goods
Can’t be overcharged by suppliers
Reduces competitors access to important markets and scares resources
Increased profits due to improved cost control
Removal of the middle man
Retailer is able to cater to the changing customer needs more rapidly due to better control over prodution
Disadvantages of Vertical BACKWARDS integration
The process leads to lack of supplier competition that may lead to lower efficiency resulting in potentially higher costs
Vertical Forwards Integration
When a firm merges with or buys another firm in the SAME INDUSTRY but FURTHER FORWARDS in the chain of production
Advantages of Vertical Forwards Integration
Guaranteed outlet for products
Firm can have greater control over sales and prices of its products
The firm own retail stores to serve as better source of customer feedback
Reduced costs of distribution
Ensures handling and logistical costs are reduced
Disadvantages of Vertical Forwards Integration
Since its processes are interdependent, one slight interruption in once process may dislocate the entire production system
Hard to manage an integrated firm because every business has its own structure, tech and problems
Conglomerate Integration
A large no. diversified businesses
When firms who make COMPLETELY DIFFERENT products merge
Advantages of Conglomerate Integration
Spreads risk
Spreads Ideas
Company may have excess cash but not any opportunity to expand into their current market
Disadvantages of Conglomerate Integration
No experience of the industry and so theres chances of mismanagement and overpricing the target company increase significantly
The shift in focus may lead to the company performing poorly in both areas
Difficult to merge cultural value
