3.1.2 Flashcards
What is organic growth?
Known as internal growth and happens when a business expands it’s own operations rather than relying on external takeovers and mergers.
What are the ways that organic growth can come about?
-Increasing existing production capacity via investment in capital and tech.
-Development/ launch of new products
-Finding new markets by exporting into emerging countries
-Establish new distribution channels
-Growing a customer base
What is inorganic growth?
Growth from outside the business
What are examples of inorganic growth?
-Takeovers
-Mergers
-Joint ventures
-Strategic alliances
How is organic growth different to inorganic growth?
It is growth inside a business
What are examples of organic growth?
New products
New locations
Exporting
Franchising
What are characteristics of businesses that grow successfully using organic growth?
-Distinctive brands and portfolios
-Use market and product development
-Resources to support expansion
-Sustained investment in new products
-Strong distribution channels
What are advantages of organic growth?
-Less risk than external growth
-Can be financed through internal funds
-Builds on business strengths
-Allows the business to grow at a more sensible rate
What are disadvantages of organic growth?
-Growth achieved may be dependent on the growth of overall market.
-Hard to build market share if its already a leader
-Slow growth- shareholder may prefer rapid growth
-Franchises can be hard to manage
What is a merger?
Involves a new firm being created into which two existing businesses are ‘merged’
What is a takeover?
Involves an existing firm acquiring more than 50% of another firm and thereby gaining control of it
Why do many merger/takeovers fail?
-Hugh financial costs of funding takeovers such as deals that relied on loan finance
-Integrating systems- companies have different tech systems
-Share price
-Fail to enhance shareholder value
-Loss of human capital/customers
-Over-paying
-Bad timing
When do joint ventures occur?
When businesses join together to pursue a common project but businesses remain separate in legal terms
What is an example of a joint venture?
Google and NASA developing Google Earth
What are the 4 types of integration?
-Forward
-Vertical
-Backwards
-Horizontal
What is forward+ vertical integration?
Acquiring a business further up in the supply chain
(Manufacture buys distributer)
What is backward + vertical integration?
Acquiring a business operating earlier in the supply chain
(Retailer buys a wholesaler)
What is horizontal integration?
Acquiring a business at the same stage of the supply chain
(Manufacturer buys a competitor)
What is conglomerate integartion?
Where the acquisition has no clear connection to the business buying it.
What are the benefits of horizontal integration?
-Achieve economies of scale
-Cost synergies from rationalisation
-Revenue synergies
-Range of products
-Reduces competition by removing key rivals
-Cheaper than organically growing a brand
What are drawbacks of horizontal integration?
-Risk of diseconomies of scale
-Reduced flexibility
-Destroying shareholder value
-Risk of attracting investigation from competition authorities
What is forward vertical integration?
An integration of a business that is closer to final consumers
(Manufacturer buying a retailer)
What is backward vertical integration?
Business integration that is closer to the raw materials in the supply chain
(Manufacturer buying component supplier)
What are advantages of vertical integration?
-Control of the supply chain
-Improved access to key raw materials
-Better control over retail distribution channels
-Removing suppliers
What are disadvantages of vertical integration?
-Fewer economies of scale
-Can often create new problems of communication and coordination
-Can lead to diseconomies of scale
What are constraints on business growth?
-Regulation
-Competition
-Finance
-Size of the market
-Human capital weakness
-Cost of recovering late payments
-Insufficient funds to train employees.
