3.1.2-3 business growth and demergers Flashcards
what is meant by organic growth
when a company grows internally by increasing number of employees, expanding sales and output
what are the advantages and disadvantages of organic growth
advantages - cheaper, less risky and easy to manage.
disadvantages - slower than external growth and doesnt always increase market share
what is meant by external growth
when a company merges with another company, as a way of growing and eliminating competition.
distinguish between a merger and an acquisition
a merger is when two firms join to form a new company, an acquisition is when a firm buys another firm and absorbs them into the parent company’s organisation
what is meant by forward vertical integration
when a company merges with another in the same market but is closer to the end user e.g. a bakery merging with a supermarket.
what are the motives for forward vertical integration
control over the distribution of the product,
economies of scale,
control over quality
customer service to protect the brand
what is meant by backward vertical integration
when a company merges with another company in the same market but towards the raw materials e.g. a bakery buying a farmer
what motives are there for backward vertical integration
- control over the raw material so they can reduce supply to competitors needing the same raw material
- guarantee quality and supply of the raw material
- increase economies of scale
what is meant by horizontal integration
when a company merges with another company at a similar/same stage of production
what are the motives for horizontal integration
- increase market share/power
- access greater economies of scale
- access new markets for existing products e.g. to expand in another country
what is meant by conglomerate integration
when a company merges with another company in a completely unrelated market
what are the motives for conglomerate integration
diversification, risk minimisation (e.g. if one product fails then they’ll have another one still working)
what are the advantages and disadvantages of external growth
advantages:
- quick compared to organic growth
disadvantage - expensive and risky
identify and explain three reasons why firms grow
- profit motive
- economies of scale
- market power motive
what is meant by a demerger
when a company splits into two or more seperate companies
what are the reasons for a demerger
- diseconomies of scale if the merged firm is inefficient
- culture clash, especially when the two firms are from different countries etc
- a firm may need to sell a loss making part of the business to reduce losses, or generate some revenue to cover issues elsewhere in the company
- the new company doesnt fit the brand values
- the company wants the move in another strategic direction
what is the impact of a demerger on the firm, employees and consumers
- can lead to uncertainty over job security
- can have an impact of share prices, and market valuation of the company
- can lead to an increase in efficiency, or a reduction in losses if diseconomies of scale
- consumers may see quality of services impacted in the short run, and in the long run there may be more competition and choice which benefits the consumers
what is meant by profit maximisation and the profit maximising conditions
profit maximisation refers to the output level at which profits are at their peak. it occurs when MC = MR
