3.1 - Business growth Flashcards
business growth
How do businesses grow?
- organic growth
- forward and backward
vertical integration - horizontal integration
- conglomerate integration
What is organic growth?
- the process of a business expanding its operations internally, relying on its own resources/retained profits and increasing sales and revenue gradually over time.
How is organic growth usually generated?
- gaining greater market share
- product diversification
- opening a new store
- international expansion/expanding into new markets
- Investing in new technology/production machinery
What are forward and backward vertical integration?
- Vertical integration is the integration of firms in the same industry but at different stages
in the production process
> Backward integration means acquiring suppliers or producers (moving towards primary production - backwards in supply chain)
> forward integration involves acquiring distribution channels or retailers (moving towards the consumer of the goods/services - towards tertiary stage of production - forwards in supply chain)
What is horizontal integration?
- When a company acquires or merges with competitors or businesses in the same industry and same stage of production integrate .
> This strategy aims to increase market share and reduce competition by consolidating similar businesses.
What is horizontal integration?
This is where firms in the same industry at the same stage of production integrate (merger/ takeover)
What is integration?
- Is growth through amalgamation, merger or takeover.
> A merger or amalgamation
is where two or more firms join under common ownership whilst a takeover is when one firm
buys another.
What are the advantages of organic growth?
- Sustainable and controlled expansion.
- Lower financial risk as it relies on internal resources.
- Builds on existing strengths and expertise.
> avoids diseconomies of scale
- Firm is able to keep control over its business
What are some disadvantages of organic growth?
The pace of growth is slower compared to other strategies
Not necessarily able to benefit from economies of scale
Access to finance may be limited
Limited in terms of rapid market capture.
Requires time and patience to see substantial results.
What are the advantages of vertical integration?
Greater control over the supply chain reduces risk as access to raw materials is more certain
Better coordination and quality control
Forward integration adds additional profit as the profits from the next stage of production are assimilated
Forward integration can increase brand visibility
Better coordination and quality control
What are the disadvantages of vertical integration?
High upfront costs for acquisitions.
Potential for increased risk if the integrated supply chain faces challenges.
Regulatory scrutiny and antitrust concerns.
Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles
What are the advantages of horizontal integration?
Rapid increase of market share
Potential for economies of scale
Reduces competition
Existing knowledge of the industry means the merger is more likely to be successful
A firm may gain new knowledge or expertise
What are the disadvantages of horizontal integration?
Integration challenges, such as cultural differences.
Regulatory hurdles and antitrust concerns.
May divert management’s attention from core operations.
Diseconomies of scale may occur as costs increase, e.g. unnecessary duplication of management roles
What are the advantages of conglomerate integration?
Diversification of risk across different industries
Capitalising on unrelated opportunities.
Potential for higher returns in diverse markets
Reduces overall risk of business failure
Increased size and connections in new industries opens up new opportunities for growth
Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate
What are some disadvantages of conglomerate integration?
Possible lack of expertise in new products/industries
Diseconomies of scale can quickly develop
Usually results in job losses
Worker dissatisfaction due to unhappiness of the takeover can reduce productivity
What are some constraints the business growth?
1) Size of the Market
2) Access to Finance
3) Owner Objectives
4) Regulation
Explain size of market as a constraint on business growth
- The size and growth potential of the target market can limit a business’s expansion
- If the market is small or saturated, it may be challenging to achieve substantial growth.
- the more niche the market, the smaller the number of potential customers.
Explain access to finance as a constraint on business growth
- Availability of capital, including loans, investments, and access to equity, is crucial for growth.
> small firms find it harder to access loans as they are considered to be more risky than larger firms. Due to the perceived risk, interest rates for any loans acquired tend to be higher - Limited access to finance can hinder expansion plans.
Explain owner objectives as a constraint on business growth
- The goals and risk tolerance of business owners or shareholders can impact growth decisions.
- Some may prioritize steady, sustainable growth, while others may seek rapid expansion.
Explain regulation as a constraint on business growth
- Large firms are often constrained by competition regulation that aims to limit monopoly power.
- Firms that sell demerit goods also find growth can be limited by government policies such as age restrictions, minimum prices and indirect taxes
What is conglomerate integration?
- Conglomerate integration involves a company diversifying its operations by acquiring businesses in unrelated industries.
> This strategy is often used to spread risk and take advantage of opportunities in different markets.
