3.1.2 - Business growth

Question 1

What can a firm do if it becomes dominant in the market ?

Answer 1

It may be able to exercise some control over the price of its product, and thereby influence the market.

Making it a price maker

Question 2

What are the two types of growth ?

Answer 2

Internal growth (Organic growth)

External growth (Inorganic growth)

Question 3

How can internal growth come about ?

Answer 3

Some firms grow simply by being successful.

Some firms may choose to borrow in order to finance their growth, perhaps by issuing shares (equity).

Question 4

What are some limits of organic growth ?

Answer 4

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

Question 5

How can diversification be a dangerous tactic ?

Answer 5

Moving into a market in which the firm is inexperienced and existing rival firms already know the business may pose quite a challenge.

Question 6

How can external growth come about ?

Answer 6

firms choosing to grow by merging with, or acquiring, other firms.

Question 7

What is the difference between an acquisition and a merger ?

Answer 7

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.

Question 8

What are the advantages of external growth ?

Answer 8

May allow some rationalisation to take place

Question 9

Define rationalisation

Answer 9

Where the duplication of resources allows a reduction of costs, as you can get rid of them

Question 10

What are the three different types of mergers ?

Answer 10

Horizontal mergers

Vertical mergers

Conglomerate mergers

Question 11

What is a horizontal merger ?

Answer 11

• A horizontal merger is a merger between firms operating in the same industry and at the same stage of the production process

Question 12

What can a horizontal merger affect ?

Answer 12

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

Question 13

In what direction can vertical mergers be ?

Answer 13

Vertical mergers may be either upstream or downstream.

Question 14

What is backwards integration ?

Answer 14

involves merging with a firm that is involved in an earlier part of the production process.

Question 15

What is forward integration ?

Answer 15

involves merging with a firm that is involved in a later part of the production process.

Question 16

What can vertical integration lead to ?

Answer 16

Vertical integration may allow rationalisation of the process of production.

Question 17

What do conglomerate mergers involve ?

Answer 17

Conglomerate mergers involve the merging of two firms that are operating in quite different markets or industries.

Question 18

What is an argument in favour of conglomerate mergers ?

Answer 18

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.

Question 19

Evaluation for conglomerate mergers

Answer 19

They are not necessarily an efficient way of doing business, as the different activities undertaken may require different skills and specialities

Question 20

What are the advantages of organic growth ?

Answer 20

• 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.

Question 21

What are the disadvantages of organic growth ?

Answer 21

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.

Question 22

What are the advantages of a horizontal merger ?

Answer 22

Providing instant access to increased economies of scale

Increase in market share, perhaps leading to increased market power.

Question 23

What are the disadvantages of a horizontal merger ?

Answer 23

Such gains in market share caused by a horizontal merger may attract the attention of the regulator,

Question 24

What are the advantages of a vertical merger ?

Answer 24

Offers greater control over the supply chain

Less subject to interruptions in supply

Question 25

What are the advantages of a conglomerate merger ?

Answer 25

A diversified portfolio of production activities may leave the firm less vulnerable to recession

Possibilities for cost savings

Question 26

What are the disadvantages of a conglomerate merger ?

Answer 26

There may be managerial diseconomies if the management team do not understand all aspects of the new diversified business.