3.1.2 Business Growth Flashcards
Organic growth
Where a business grows internally by reinvesting profits or borrowing from banks
Ways to grow organically
- the launch of new products
- expansion into new markets
- franchising
- exporting
- new distribution channels
Examples of business with organic growth
Subway, Poundland
Reasons for organic (internal) growth
- to increase market share
- development of new innovative products
- finding new markets to sell its existing products
- getting existing customers to buy more products through as or investing new capital or tech to expand production
Inorganic (external) growth
Growth from outside (e.g merging, acquiring or taking over another firm)
- e.g google bought Youtube
Vertical integration
When a firm merges with or takes over another firms in the same industry, but a different stage production
Forward vertical integration
Where one firm integrates with a firm in a sage of production closer to the consumer
- e.g a brewer buying a pub chain
Backward vertical integration
Where a firm integrates with another in the stage of production further away from the customer
- e.g a car manufacturer buying a tyre manufacturer
Horizontal integration
Acquiring a business at the same stage of production in the same industry
- e.g Virgin money & Northern Rock, Amazon & LoveFilm
Conglomerate integration
Where two businesses in different industries merge
- e. Tata’s with jaguar, land rover
Organic growth advantages
- less risky than inorganic growth
- firms grow by building upon their strengths and using own funds (retained profits) to fund growth. So firm is not building up debt & growth is sustainable
- existing shareholders retain their control over firm (reduce conflicts)
Organic growth disadvantages
- this is a long term strategy & is slower
- if firm rely on the strength of market to grow, it could limit how much/fast they can grow
Vertical integration advantages
- greater control over the supply chain = reducing costs and improving quality
- Reduced information gaps (more certainty) = increased knowledge = better access to raw materials = increased quality
- Firms can increase their efficiency, through gaining economies of scale = reduce their average costs = lower prices for consumers.
Vertical integration disadvantages
- different cultures in businesses
- diseconomies of scale
- Unfamiliar industry
- “Winner’s curse”
- Create barriers to entry (might discourage or limit the entrance of new firms) = a less efficient market, since the firm has little incentive to reduce their average costs when their market share is high.
Horizontal integration advantages
- Firms can grow quickly, which can give them a competitive edge over other firms in the market. However, this could lead to monopoly power and there is the potential of lower inefficiency as a result
- Quick growth; economies of scale
- spreading risk
- allowing rationalisation
- reducing competition (due to a change in market)
- Increased market share
- The two firms will have expertise in the same industry, so the merged firm can gain advantages, such as in marketing
Horizontal integration disadvantages
- different cultures in businesses
- diseconomies of scale (“Winner’s curse”: buying a company might pay too high a price)
Conglomerate integration advantages
- reducing risk by operating in different markets
- benefiting from knowledge from the other market;
Conglomerate integration disadvantages
- The requirement for different skills
- not necessarily benefiting from economies of scale
- cultural difference
- There is a risk of spreading the product range too thinly, and there might not be sufficient focus on each range. This might reduce quality and increase production costs
Constraints on business growth
- the size of the market
- limited access to finance
- Owner objectives
- Regulation
Constraints on business growth (the size of the market)
- A small market = limited opportunities for business expansion (since firms can only access a limited consumer market and there might be limited opportunities for innovation and expansion)
- Larger markets, such as the market for mobile phones = wider scope for innovation, and firms can take advantage of huge selling opportunities.
Constraints on business growth (limited access to finance)
- Smaller and newer firms = less able to get access to finance than larger, more established firms. This is because they are deemed riskier than established firms.
- Also banks have become more risk averse since the global financial crisis, which has limited the number and size of loans on the market. Without sufficient access to credit, firms cannot invest and grow, and firms cannot innovate as much.
Constraints on business growth (Owner objectives)
- Owners might have different objectives.
- Philanthropic owners might aim to maximise social welfare, or have a strong Corporate Social Responsibility (CSR) with objectives for the environment in mind.
- Some owners = maximise profits whilst others might a bigger personal gain in the form of bonuses and reputation.
- Therefore, some owners might not have business growth as an important objective.
Constraints on business growth (regulation)
- Excessive regulation (‘red tape’)
- It can limit the quantity of output that a firm produces.
- E.g environmental laws and taxes might result in firms only being able to produce a certain quantity before exceeding a pollution permit.
- Excessive taxes (e.g high rate of corporation tax) can discourage firms earning above a certain level of profit, since they do not keep as much of it = limit the size that a firm chooses,grow to.
Constraints on business growth (regulation) example
- The UK govt has established the ‘Red Tape Challenge’, which aims to simplify regulation for businesses. This aims to make it cheaper and easier to meet environmental targets and create new jobs.
