3.1.2 Business growth

Question 1

what is organic growth (internal)?

Answer 1

where the firm grows by increasing their output/FOP , for example increased investment or more labour. They may open new stores, increase their range of products

e.g. LEGO introduced new products, such as Lego Friends and board games to expand their customer base.

Question 2

what are advantages of organic growth?

Answer 2

less risky, many mergers and takeovers end up failing
ability to control and plan whereas inorganic growth can be unpredictable
less expensive as financed through internal funds e.g. retained profits
builds on a businesses strengths

Question 3

what are disadvantages of organic growth?

Answer 3

growth achieved is dependant on the growth of that market

slow growth, firms may want a more rapid growth

Question 4

what is horizontal integration?

Answer 4

This is where firms in the same industry at the same stage of production integrate.

e.g. In 2015, AstraZeneca acquired ZS Pharma for $2.7bn.
Disney and Pixar

Question 5

what are advantages of horizontal integration?

Answer 5

• helps to reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets.
• business is able to grow in a market where it already has expertise , which is more likely to make the merger successful.
• exploit internal economies of scale

Question 6

disadvantages of horizontal integration?

Answer 6

• risk of diseconomies of scale from enlarged businesses especially if management style and culture clash
• reduction in flexibility
• will increase risk for the business as if that particular market fails, they have nothing to fall back on and will have invested a lot of money into that area

Question 7

what is vertical integration?

Answer 7

Vertical integration is the integration of firms in the same industry but at different stages in the production process.
If the merger takes the firm back towards the supplier of a good, it is backwards integration. Forward integration is when the firm is moving towards the eventual consumer of a good

Question 8

example of vertical integration?

Answer 8

Tesco’s £3.7bn takeover of Booker in 2018 is an example of vertical integration. It has led to
an increase in sales for Tesco.
Netflix producing its own content

Question 9

advantages of vertical integration?

Answer 9

• improves access to raw materials, rivals have to pay more for them
• improved control over retail distribution, adding new channels to sales platforms to build business revenues
• increases firm’s market power, removing suppliers and taking market intelligence away from competitors
• won’t be charged high prices for supplies, keeping costs low and allowing lower prices for consumers. This can increase competitiveness and sales.
• less risks as suppliers do not have to worry about buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods.

Question 10

disadvantages of vertical integration?

Answer 10

• Firms may have no expertise in the industry they took over

- fewer economies of scale as production is at different stages of supply

Question 11

what is conglomerate integration?

Answer 11

where firms in different industries with no obvious connections integrate
Ebay and paypal, Amazon and whole foods

Question 12

advantages of conglomerate integration?

Answer 12

helps the company in diversification hence a company is less vulnerable to losses due to decline in sales in one sector or industry.
Expanded customer base
Risk of loss lessens, if one firm performs poorly the other better-performing business unit can compensate for the losses
Gain synergies

Question 13

synergies?

Answer 13

the value and performance of two companies combined will be greater than the sum of the separate individual parts

Question 14

disadvantages of conglomerate integration?

Answer 14

Can shift focus and resources away from core operation, can lead to poor performance.
Difficult to develop a new corporate culture where behaviours and values align with vision of the new firm

Question 15

how does size of market constrain business growth?

Answer 15

A market is limited to a certain size and so not all businesses are able to mass produce because their goods would not be bought by consumers.

Question 16

how does access to finance constrain business growth?

Answer 16

two main ways to finance growth: retained profits and
loans. If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow. Banks may be unwilling to lend firms money, particularly smaller businesses that they see as high risk. As a result, firms will be unable to grow as they can’t finance it.

Question 17

how do owner objectives constrain growth?

Answer 17

Some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with growth.

Question 18

how does regulation constrain business growth?

Answer 18

government may introduce regulation which
prevents businesses from growing. Competition law, which prevents monopolies, can restrict growth as any merger which creates a company with more than a 25% market share can be forbidden from taking place.