3.1.2-3 Business Growth and Demergers

Question 1

What is meant by organic growth?

Answer 1

When a company grows internally, by expanding output, sales and number of employees.

Question 2

Where are the advantages and disadvantages of organic growth?

Answer 2

• It is less risky and cheaper than external growth.

- It is slower than external growth

Question 3

What is meant by external growth?

Answer 3

When a company grows by acquiring or merging with another company. It is a fast way to grow and has many other positives but it is very risky and expensive as it could fail and lead to a demerger.

Question 4

Distinguish a merger and an acquisition.

Answer 4

A merger is when two firms join to create to make a single company. 
An acquisition (takeover) is where a firm buys another firm and becomes the parent organisation - this could be hostile.

Question 5

What is meant by forward vertical integration?

Answer 5

When a company merges with a company who are in the same industry but closer to the customer.

Question 6

What are the motives for forward integration?

Answer 6

• Control over the distribution of the product
• Economies of scale
• Control over quality and customer service

Question 7

What is meant by backward integration?

Answer 7

When a company merges with another company in the same industry but closer to the raw material and production end.

Question 8

What motives are there for backward vertical integration?

Answer 8

• Control over the raw material so that they can reduce supply to competitors needing the same raw material
• To guarantee quality and supply of the raw material or component
• To increase economies of scale.

Question 9

What is meant by horizontal integration?

Answer 9

When a company merges with another company in the same industry and the same stage of production.

Question 10

What are the motives for horizontal integration?

Answer 10

• To increase market share/power
• To increase brand awareness
• To enter a market in a new area.

Question 11

What is meant by conglomerate integration?

Answer 11

When a company merges with a company in a completely unrelated industry.

Question 12

What are the motives for conglomerate integration?

Answer 12

• Diversification and risk minimisation.

Question 13

What are the advantages and disadvantages of external growth?

Answer 13

• Quick compare to Organic growth

- Expensive and risky

Question 14

Identify 3 reasons why some firms grow

Answer 14

• Profit Motive
• To own a greater market share
• Economies of scale

Question 15

What is meant by a demerger?

Answer 15

When a company splits (or sells a part of their company as a separate, working company) into two or more different entities.

Question 16

What are the reasons for a demerger?

Answer 16

• Diseconomies of scale
• Culture clash
• Expected results did not materialise
• Firm may want to move in a different direction.

Question 17

What is the impact of a demerger on the firm, employees and consumers?

Answer 17

• Can lead to uncertainty in a job
• It can impact share prices (positive or negative depending whether the merger is in the firms interests or not)
• Consumers may see quality and services affected in the short run as companies split.
• Consumers may see more competition and choice in the long run however.