3.1.2-3 Business Growth + Demergers

Question 1

what is meant by vertical integration

Answer 1

Vertical integration is when a firm integrates with another firm at a different stage of the same production process.

Question 2

pros of vertical integration

Answer 2

• control of the supply chain (backward) -> reduces unit costs (rivals pay more or cannot use them at all )-> improves quality of inputs into the production process -> better quality of goods + services for consumers
• reduce intermediary (middleman) costs -> more access to raw materials -> no need to pay extra (e.g. markup) -> reduces production costs -> can be passed down to consumers = lower prices
• better access + increase market power -> more control -> higher market power-> greater bargaining position over rivals

Question 3

cons of vertical integration

Answer 3

• regulation -> firms may prevent competitors from using their resources -> limited access to raw materials -> regulators (e.g. Ofgem) may step in
• risk of DisEoS + high acquisition costs -> increase size of firm -> disEoS (due to lack of control, communication/co-ordination + management) ->increase LRAC -> reduce profits
• increased complacency -> less innovative -> increased X-inefficiency-> increase production costs -> reduce profits -> high costs might be passed down to consumers = higher prices
• may lack expertise -> reduced productivity -> increased costs

Question 4

what is meant by horizontal integration

Answer 4

when a firm integrates with another firm at the same stage of the production process.

Question 5

pros of horizontal integration

Answer 5

• exploit internal EoS (‘RMFPTM’) -> give example of an internal EoS -> lower LRAC -> increased profits (can increase productivity for some)
  -rationalisation - the reorganisation of a company in order to increase its operating efficiency -> ie removing duplicate machinery, equipment, workers, etc. -> reduces costs -> increases profits + boosts efficiency [productive]

Question 6

cons of horizontal integration

Answer 6

• risk of disEoS - for reason (‘CCM’) -> increased LRAC -> reduced profits -> high costs = passed down to consumers
• job losses - firms take cost-cutting measures -> workers lose their jobs
• reduces competition -> rival removed -> less competition -> inc. market share -> long-run pricing power
• brand dilution -> ruins reputation of firm -> may lose consumer base -> reduced profits

Question 7

what is meant by conglomerate integration

Answer 7

when a firm integrates with another firm that is in a different industry

Question 8

pros of conglomerate integration

Answer 8

• risk-bearing economies of scale -> reduces cost of failure -> firm is not as dependent
• increased brand recognition
• knowledge transfers

Question 9

cons of conglomerate integration

Answer 9

• internal DisEoS -> same reason
• brand dilution -> ruins reputation -> reduced consumer base -> less profit
• may lack expertise

Question 10

what are the constraints on business growth?

Answer 10

• regulatory hurdles
• finding skilled staff
• disruptive technologies
• financial constraints
• size of potential markets
• ## controlling costs of a growing businesses

Question 11

what are examples of financial constraints on business growth?

Answer 11

• limited capital + debt - smaller businesses usually face higher interest on loans
• poor cash-flow management can impede growth
• high debt levels - high interest payment + repayments -> limit business’ ability to allocate funds to growth-oriented activities

Question 12

what are the reasons for demergers?

Answer 12

• focusing on core businesses to cut AC -> improve profit margins + returns for shareholders
• reduce risk of disEoS -> lower management costs
• defensive tactic to avoid the attention of competition authorities that might be investigating monopoly power
• management might feel there is a lack of synergy

Question 13

what is meant by synergy

Answer 13

when two or more people or organisations combine their efforts, they can accomplish more together than they can separately. no synergy = disEoS

Question 14

impact of demergers on employees

Answer 14

• job uncertainty - some positions may be duplicated or no longer needed, leading to layoffs
• changes to compensation/benefits
• job opportunities - employees can take on new roles and develop new skills

Question 15

impact of demergers on customers

Answer 15

• disruption of services - systems + operations divided -> customers may experience delays/changes in service quality
• choice + competition - may lead to increased competition -> lower prices -> improved service quality
• contractual changes - if customers have ongoing contracts with demerged entity, terms + conditions may be affected

Question 16

impact of demergers on businesses

Answer 16

• increased efficiency from specialisation + focus
• reduction in economies/diseconomies of scale
• firm will have greater independence e.g. negotiating their own contracts