3.1.2 - Business growth Flashcards
What can a firm do if it becomes dominant in the market ?
It may be able to exercise some control over the price of its product, and thereby influence the market.
Making it a price maker
What are the two types of growth ?
Internal growth (Organic growth)
External growth (Inorganic growth)
How can internal growth come about ?
Some firms grow simply by being successful.
Some firms may choose to borrow in order to finance their growth, perhaps by issuing shares (equity).
What are some limits of organic growth ?
A firm may find that its product market is saturated, so that it can grow further only at the expense of other firms in the market.
If its competitors are able to maintain their own market shares, the firm may need to diversify its production activities
How can diversification be a dangerous tactic ?
Moving into a market in which the firm is inexperienced and existing rival firms already know the business may pose quite a challenge.
How can external growth come about ?
firms choosing to grow by merging with, or acquiring, other firms.
What is the difference between an acquisition and a merger ?
The distinction here is that an acquisition (or takeover) may be hostile, whereas a merger may be the coming together of equals, with each firm committed to forming a single entity.
What are the advantages of external growth ?
May allow some rationalisation to take place
Define rationalisation
Where the duplication of resources allows a reduction of costs, as you can get rid of them
What are the three different types of mergers ?
Horizontal mergers
Vertical mergers
Conglomerate mergers
What is a horizontal merger ?
- A horizontal merger is a merger between firms operating in the same industry and at the same stage of the production process
What can a horizontal merger affect ?
It can affect the degree of market concentration
When the merger takes place, there are fewer independent firms in the market
This may lead to an increase in the market power held by the new firm
In what direction can vertical mergers be ?
Vertical mergers may be either upstream or downstream.
What is backwards integration ?
involves merging with a firm that is involved in an earlier part of the production process.
What is forward integration ?
involves merging with a firm that is involved in a later part of the production process.
What can vertical integration lead to ?
Vertical integration may allow rationalisation of the process of production.
What do conglomerate mergers involve ?
Conglomerate mergers involve the merging of two firms that are operating in quite different markets or industries.
What is an argument in favour of conglomerate mergers ?
They reduce the risks faced by firms
By operating in a number of markets that are on different cycles, the firm can even out its activity overall.
Evaluation for conglomerate mergers
They are not necessarily an efficient way of doing business, as the different activities undertaken may require different skills and specialities
What are the advantages of organic growth ?
- Organic growth tends to be the lowest-risk form of growth and the control of the firm remains unchanged.
- Organic growth can also be good for the workers’ morale and means there will be more job opportunities within the firm, with increased scope for management roles.
What are the disadvantages of organic growth ?
Disadvantages are that organic growth tends to be slow and building on the existing knowledge of existing workers means that people might be unaware of new ideas or innovations or unwilling to take on new ideas if the involve change.
What are the advantages of a horizontal merger ?
Providing instant access to increased economies of scale
Increase in market share, perhaps leading to increased market power.
What are the disadvantages of a horizontal merger ?
Such gains in market share caused by a horizontal merger may attract the attention of the regulator,
What are the advantages of a vertical merger ?
Offers greater control over the supply chain
Less subject to interruptions in supply
What are the advantages of a conglomerate merger ?
A diversified portfolio of production activities may leave the firm less vulnerable to recession
Possibilities for cost savings
What are the disadvantages of a conglomerate merger ?
There may be managerial diseconomies if the management team do not understand all aspects of the new diversified business.
