3.1.2 Business Growth Flashcards
Reasons for Growth
Profit maximising companies are motivated to grow for a number of reasons:
- A larger company can exploit economies of scale more fully.
- A larger company may be more able to control its markets.
- A larger company may be more able to reduce risk.
- When there is a divorce of ownership from control, a larger company may justify higher salaries/bonuses to directors and managers.
Organic Growth
> Organic growth is where firms grow by increasing their output, e.g. through increased investment or more labour.
Firms can grow inorganically through merging with, acquiring or taking over another firm.
Organic Growth Adv+Disadv:
Advantages:
> Less risky than inorganic growth. Also less expensive.
> Growth is more sustainable because the firm uses their own funds to grow, debt isn’t being built up.
> The firm is able to keep control over the business. Reduces potential conflicts. Workers don’t leave due to being poorly managed from integration.
Disadvantages:
> Long term strategy. Significantly slower than inorganic growth. Competitors may be able to grow faster, and shareholders could be unhappy if they want faster growth.
> Sometimes another firm has a market or asset which the company could not possibly gain through organic growth. Integration would be the only way to achieve it.
> Firms may rely on the strength of the market to grow, which could limit how much/how fast they grow.
Integration
Integration is growth through amalgamation, merger or takeover. A merger or amalgamation is when two or more firms join under common ownership, whilst a takeover is when one firm buys another.
Vertical Integration (forward + backward):
> Vertical integration is the integration of firms in the same industry, but at different stages in the production process.
If the integration takes the firm back towards the supplier, it is backwards vertical integration.
Forward integration is when the firm is moving towards the eventual consumer of the good.
Vertical Integration ADV+DISADV:
Advantages:
> May be cost savings, integrating a supplier/buyer into the firm may make the firm more efficient.
> Less risk. Firms have more certainty over their production, with factors such as quality, quantity and price.
> Firms can gain more control of the market. Backwards integration means that they won’t get charged higher prices for supplies, keeping average costs low and increasing competitiveness and sales. Cost advantage over competitors.
> Forward integration secures buyers and can restrict access to these buyers for competitors.
Disadv:
> There are some diseconomies of scale
> Vertical integration creates barriers to entry. This could lead to a less efficient market, since the firm has little incentive to to reduce AC when the market share is high.
> Firms may have no expertise in the industry they took over.
> Firms often pay too much, and their share price falls rather than rises.
> Can be difficulties in merging the firms into one.
> Many of the key workers in the firm that’s been taken over may leave, taking their expertise with them.
Horizontal Integration (+ Adv and Disadv):
Where firms in the same industry at the same stage of production integrate.
Adv:
> Helps reduce competition because a competitor is taken out, and increases market share, giving the firm more power in the market.
> The firm can grow in a market where it already has expertise, which makes the merger more likely to be successful.
> Firms can quickly increase output, and take advantage of economies of scale.
> Allows a firm to get unique assets before owned another company.
Disadv:
> Increases risk. If that market fails, they have nothing to fall back on and will have invested a lot of money in this market.
> Same as Vert disadv. (bottom 3)
Conglomerate Integration (+ Adv and Disadv):
Where firms in different industries with no common interest integrate.
Adv:
> Reduces risk. If one market fails, they will still survive due to the other parts of the business. Less dependant on one market.
> May find it easier to expand than when the firms were independent. Finance can be more easily obtained, and senior managers can be transferred from company to company.
> Opportunity for asset stripping. The assets may be more valuable than the buying price of the company.
> Useful when there’s no room for growth in their current market.
Disadv:
> Going into a market where they have no expertise. Lack of understanding can reduce performance.
> Asset stripping is bad for workers, customers and local economies. Workers lose jobs, customers lose products, local economies lose workers and income.
Constraints of Business Growth
> Size of the Market - a small market May only have limited opportunities for business expansion, since firms can only access a limited amount of consumers and there will be less opportunities for expansion. Larger markets will have a much wider scope for innovation and expansion.
Access to finance - smaller and newer firms tend to be less able to get finance than larger more established firms. This is because they are considered riskier. Most of these smaller companies will use retained profit instead. If they do not make enough then they will not be able to grow. Without sufficient access to credit firms can’t invest and grow.
Owner Objectives - some owners may not want their business to grow any further as they are happy with the current profits and don’t want the extra risk or work that comes with growth. Other owners will want to grow.
Regulation - in some markets the government may introduce regulation which prevents businesses from growing.
Synoptic points
> Macroeconomic factors influence a firms growth, e.g. a recession will negatively effect growth due to lower levels of demand. Will also make banks less likely to lend.
Globalisation has made foreign markets more accessible to domestic firms. This gives firms a larger market (to export to).
The buying of UK firms by foreign buyers is a form of FDI, so takeovers can have an effect on a country’s financial account on the balance of payments.
