3.1.2 Flashcards
Organic growth
When firms grow by expanding their production through increasing output, widening their customer base, by developing a new product or diversifying their range
What might firms do to have organic growth
- use market penetration to sell more of their products to existing customers
- invest in research and development, technology or production capacity , allows sales to increase and the volume of output to expand
Inorganic growth
Firms can grow inorganically through merging with, acquiring or taking over another firm
Advantages of organic growth
- less risky than inorganic growth
- firms grow by building upon their strengths and using their own funds, such as retained profits, to fund the growth- this means no debt and the growth is more sustainable
- existing shareholders retain their control over the firm, which might reduce conflicts when there is takeover
Disadvantages of organic growth
- a long term strategy and is significantly slower than growing inorganically. Could mean competitors gain more market power by expanding in the mean time
- firms might rely on the strength of the market to grow, which could limit how much and how fast they can grow
Vertical integration
Occurs when a firm merges with or takes over another firm in the same industry, but a different stage of production
Forward vertical integration
Occurs when the firm integrates with another firm closer to the consumer. Involves taking over a distributor
Eg, a coffee producer might buy the cafe where the coffee is sold
Backward vertical integration
Occurs when a firm integrates with a firm closer to the producer. Involves gaunt control of suppliers
Eg, coffee producer might buy a coffee farm
Advantages of vertical integration
• firms can increase their efficiency, through economies of scale, which could reduce their average costs
• firms can gain more control of the market
• firms have more certainty over their production, quality/quantity and price
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Disadvantages of vertical integration
- diseconomies of scale could be considered
- vertical integration can create barriers to entry, which might discourage or limit the entrance of new firms
Lead to a less efficient market
Horizontal integration
Merger of two firms in the same industry and the same stage of production
Eg, a car manufacturer merges with another car manufacturer, they will have horizontally integrated
Advantages of horizontal integration
- firms cans grow quickly, which can give them a competitive edge over other firms in the market
- firms can increase output quickly, so they take advantage of economies of scale
- the two firms will have expertise in the same industry, so the merger firm can gain advantages such as in marketing
Disadvantages of horizontal integration
-firms growing quickly can lead to monopoly power and there is the potential if lower inefficiency as a result
- could be disagreements in the objectives of the two merged firms
Conglomerate integration
- combining of 2 firms with no common connection
Eg, associated British own foods owns primark and Patak’s
Advantages of conglomerate integration
- can help both firms become stronger in the market, than if they were individual
- conglomerate can reach out to a wider customer base, and market competition could be reduced
- ## advantages if economies go scale
Disadvantages of conglomerate integration
- risk bearing economies of scale
- risk of spreading the product range too thinly, Might not be sufficient focus on each range - reducing quality and increase production costs
Constraints on business growth
- size of the market
- access to finance
- owner objectives
- regulation
How can size of the market put constraints on business growth
- small market might only have limited opportunities for business expansion
Limited oppirtunities if innovation and expansion
How can access to finance have constraints on business growth
Smaller and newer firms tend to be less able to get access to finance than larger, more established firms because they are deemed more riskier.
Without sufficient access to credit, firms cannot invest and grow, and firms cannot innovate as much
How does owner objectives have constraints on business growth
Some owners might aim to maximise profits whilst others might have a bigger personal gain in the form of bonuses and reputation
Some owners might not shave business growth as an important objective
Regulation as constraints on business growth
- can limit the quantity of output that a firm can produce
Eg, environmental laws and taxes