3.1.2-3 business growth and demergers

Question 1

what is meant by organic growth

Answer 1

when a company grows internally by increasing number of employees, expanding sales and output

Question 2

what are the advantages and disadvantages of organic growth

Answer 2

advantages - cheaper, less risky and easy to manage.

disadvantages - slower than external growth and doesnt always increase market share

Question 3

what is meant by external growth

Answer 3

when a company merges with another company, as a way of growing and eliminating competition.

Question 4

distinguish between a merger and an acquisition

Answer 4

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

Question 5

what is meant by forward vertical integration

Answer 5

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.

Question 6

what are the motives for forward vertical integration

Answer 6

control over the distribution of the product,
economies of scale,
control over quality
customer service to protect the brand

Question 7

what is meant by backward vertical integration

Answer 7

when a company merges with another company in the same market but towards the raw materials e.g. a bakery buying a farmer

Question 8

what motives are there for backward vertical integration

Answer 8

• 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

Question 9

what is meant by horizontal integration

Answer 9

when a company merges with another company at a similar/same stage of production

Question 10

what are the motives for horizontal integration

Answer 10

• increase market share/power
• access greater economies of scale
• access new markets for existing products e.g. to expand in another country

Question 11

what is meant by conglomerate integration

Answer 11

when a company merges with another company in a completely unrelated market

Question 12

what are the motives for conglomerate integration

Answer 12

diversification, risk minimisation (e.g. if one product fails then they’ll have another one still working)

Question 13

what are the advantages and disadvantages of external growth

Answer 13

advantages:
- quick compared to organic growth
disadvantage - expensive and risky

Question 14

identify and explain three reasons why firms grow

Answer 14

• profit motive
• economies of scale
• market power motive

Question 15

what is meant by a demerger

Answer 15

when a company splits into two or more seperate companies

Question 16

what are the reasons for a demerger

Answer 16

• 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

Question 17

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

Answer 17

• 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

Question 18

what is meant by profit maximisation and the profit maximising conditions

Answer 18

profit maximisation refers to the output level at which profits are at their peak. it occurs when MC = MR