3.1.2 Business Growth Flashcards
Organic Growth is known as what type of growth
Internal Growth
What is Organic growth?
happens when a business expands its own operations instead of relying on external takeovers and mergers
Builds on the business’s own capabilities and resources - common for most businesses
Organic Growth can come about from
- Increasing existing production capacity through investment in capital and technology
- Development & launch of new products (achieve economies of scope)
- Finding new markets by exporting to emerging countries (India and South Africa)
- Establish new distribution channels such as online sale platforms
- Growing a customer base through marketing and adding new users of a product
What are the advantages of Organic Growth
- Less Risks than external growth - many takeovers failed to achieve expected gains
- Can be financed through internal funds (i.e. retained profit)
- Builds on a business’ strengths
- Allows the business to grow at a more sustainable and sensible rate
What are the disadvantages of Organic growth
- Growth achieved may be dependent on the growth of the overall market
- Hard to build extra market share if business is already a leader
- Slow Growth - Shareholders may prefer more rapid growth
- Franchises may be hard to manage effectively
What is Horizontal integration
is between two businesses in the same industry at the same stage of production
e.g Waterstones bought Foyles bookshops in 2018
Advantages of Horizontal integration
- Exploit internal economics of scale including bulk-buying, technical economics, financial economies
- Cost-saving from the rationalisation of the business - involves job losses
- Potential to secure revenue synergies by creating a wider range of products (diversification) - opportunities for economies of scope
- Reduced competition by removing key rivals - this increases market share and long-run pricing power
- Buying an existing and well-known brand can be cheaper in the long run than organically growing and potential barriers for future rivals
Disadvantages of Horizontal Integration
- Risk of diseconomies of scale from enlarged businesses (clashes of management culture and integrating different businesses)
- Reduced flexibility (increased transparency and accountability from red tape could reduce innovation + new products)
- Destroying shareholder value due to synergies never materialise (increase in shareholder value from big mergers rarely happens)
- Risk of attracting investigation from competition authorities
What is Vertical Integration
Involves acquiring a business in the same industry but at a different stage of the supply chain
It is the merger of two firms at a different stage of the same industry of process of production or same final product
What are the two types of Vertical Integration
Forward Vertical
Backwards Vertical
What is Forwards vertical Integration
Integration of a business that is closer to final consumers
E.g. manufacturer buying a retailer
What is Backwards Vertical Intergration
Business integration that is closer to the raw materials in the supply chain
E.g. Manufacturer buying a component/raw material supplier
Advantages of Vertical integration
- Control of the supply chain - helping to reduce unit cost and quality of production - backwards
- Improved access to key raw materials - rivals might pay more - Backwards
- Better control over retail distribution channels + adding new channels - forward
- Removing Suppliers and taking market intelligence away from competitors - backwards
Disadvantages of vertical integration
- Fewer economies of scale because most of the production is at different levels
- Create problems like communication and coordination within bigger more disparate firms - diseconomies due to inefficiencies
What is a conglomerate
has acquired a large number of diversified businesses
examples include: Siemens, Samsung
