3.1.2-3 Business Growth and Demergers Flashcards
What is meant by organic growth?
When a company grows internally, by expanding output, sales and number of employees.
Where are the advantages and disadvantages of organic growth?
- It is less risky and cheaper than external growth.
- It is slower than external growth
What is meant by external growth?
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.
Distinguish a merger and an acquisition.
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.
What is meant by forward vertical integration?
When a company merges with a company who are in the same industry but closer to the customer.
What are the motives for forward integration?
- Control over the distribution of the product
- Economies of scale
- Control over quality and customer service
What is meant by backward integration?
When a company merges with another company in the same industry but closer to the raw material and production end.
What motives are there for backward vertical integration?
- 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.
What is meant by horizontal integration?
When a company merges with another company in the same industry and the same stage of production.
What are the motives for horizontal integration?
- To increase market share/power
- To increase brand awareness
- To enter a market in a new area.
What is meant by conglomerate integration?
When a company merges with a company in a completely unrelated industry.
What are the motives for conglomerate integration?
- Diversification and risk minimisation.
What are the advantages and disadvantages of external growth?
- Quick compare to Organic growth
- Expensive and risky
Identify 3 reasons why some firms grow
- Profit Motive
- To own a greater market share
- Economies of scale
What is meant by a demerger?
When a company splits (or sells a part of their company as a separate, working company) into two or more different entities.
What are the reasons for a demerger?
- Diseconomies of scale
- Culture clash
- Expected results did not materialise
- Firm may want to move in a different direction.
What is the impact of a demerger on the firm, employees and consumers?
- 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.
