3.1.2 Business Growth Flashcards
What is organic growth?
Where firms grow by increasing their output, for example increasing investment or labour. They may open new shops or increase their product range.
What are the advantages of organic growth?
- integration is time consuming, expensive and high risk
- firm can keep control of their business
What are the disadvantages of organic growth?
- another firm may have the market share or asset another firms need which is unobtainable through internal growth
- slow process
- difficult to generate new ideas
What is integration?
Is business growth through amalgamation, merger or takeover.
What is a merger/amalgamation?
Where two or more firms join together under common ownership
What is a takeover?
When one firm buys another
What is vertical integration?
When firms merge together in the same industry but at different stages in the production process
What is backwards vertical integration?
When a firm in the same industry merges, but they merge with a firm prior in the production process
What is forwards vertical integration?
When a firm in the same industry merges, to a firm ahead of it in the production process
What are the advantages of vertical integration?
- increased potential for profit as firm takes over profit from other parts of production process
- less risk as do not have to worry about buyers not buying their goods
- (backwards) ensure delivery is reliable and quality is good
- (forward) secures retail outlets and therefore restrict competitors
What is the disadvantage of vertical integration?
-firms may have no knowledge about the process in the different stages of production. For example, selling or buying of cars may have no knowledge about how to make one
What is horizontal integration?
When firms at the same stage of production integrate together
What are the advantages of horizontal integration?
- helps reduce competition as a competitor is taken out (merged)
- increases market share
- firms can reduce the areas of the business which will duplicate, lowering AC
- already has expertise, making it successful
What are the disadvantages of horizontal integration?
-increases risk as the because if the market fails they have nothing to fall back on
What is conglomerate integration?
When firms in an entirely different industry merge together.
What are the advantages of conglomerate integration?
- useful for firms when there is no room for growth in present market
- reduces the risk for the firm if one market/industry fails
- easier for each individual strand of the business to expand as managers can be transferred
What is the disadvantage of conglomerate integration?
-may enter a market with no expertise and this can often be damaging for the firm
How can the size of the market constraint business growth?
A market is limited to a certain size, so consumers may not even buy the good that turns out to be massed produced. This can occur in niche markets for luxury items
How can access to finance restrict business growth?
A firm may not be able to access a loan from the bank. Furthermore, if the owners have to give a large amount of profit to the shareholders then they will be unable to invest large sums into the business
How can owner objectives restrict business growth?
Some owners may not want to grow their firm anymore as they are happy with current profits
How can regulation restrict business growth?
The government may introduce legislation which prevents a business from growing. For example, competition law prevents monopolies from owning 25% of the market share if they were to merge.
