3.1.2 Business Growth Flashcards
Growth
There are two main types of growth: internal/organic growth and integration.
Organic growth
Organic growth is where the firm grows by increasing their output, for example increased investment or more labour. They may open new stores, increase their range of products etc. Almost all growth of firms is organic.
- An example of a firm who grew through organic growth is LEGO. They introduced new products, such as Lego Friends and board games to expand their customer base.
Organic growth example
An example of a firm who grew through organic growth is LEGO. They introduced new products, such as Lego Friends and board games to expand their customer base.
Organic growth advantages
● Integration is expensive, time-consuming and high risk, with evidence suggesting that the long-term share price of the company falls following integration. Firms often pay too much for takeovers and integration is often poorly managed with many key workers tending to leave after the change.
● The firm is able to keep control over their business.
Organic growth disadvantages
● Sometimes another firm has a market or an asset which the company would be unable to gain through organic growth. For example, integration would allow a European company to expand into the Asian market which it has no expertise in.
● Organic growth may be too slow for directors who wish to maximise their salaries.
● It will be more difficult for firms to get new ideas.
Integration
Integration is growth through amalgamation, merger or takeover. A merger or amalgamation is where two or more firms join under common ownership whilst a takeover is when one firm buys another.
Forward and backward vertical integration
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.
- Example: 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.
Vertical integration example
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.
Vertical integration advantages
● There is increased potential for profit as the firm takes the potential profit from a
larger part of the chain of production.
● There will be 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.
● With backward integration, businesses can control the quality of supplies and ensure delivery is reliable. Moreover, they don’t have to worry about being charged high prices for supplies, keeping costs low and allowing lower prices for consumers.
This can increase competitiveness and sales.
● Forward integration secures retail outlets and can restrict access to these outlets for competitors.
Vertical integration disadvantages
● Firms may have no expertise in the industry they took over, for example a car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa.
Horizontal integration
This is where firms in the same industry at the same stage of production integrate.
Example: In 2015, AstraZeneca acquired ZS Pharma for $2.7bn. It gave them access to new compounds and was a long term deal intended to strengthen a specific sector of their business. Other well-known examples are Currys and PC Worlds and Arcadia, who own Topshop, Evans, Dorothy Perkins etc.
Horizontal integration example
In 2015, AstraZeneca acquired ZS Pharma for $2.7bn. It gave them access to new compounds and was a long term deal intended to strengthen a specific sector of their business. Other well-known examples are Currys and PC Worlds and Arcadia, who own Topshop, Evans, Dorothy Perkins etc.
Horizontal integration advantages
● This helps to reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets.
● Firms will be able to specialise and rationalise, reducing the areas of the businesses which are duplicated.
● The business is able to grow in a market where it already has expertise, which is more likely to make the merger successful.
Horizontal integration disadvantages
● The problem is that it 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. They are ‘placing all their eggs in one basket’.
Conglomerate integration
This is where firms in different industries with no obvious connections integrate. They can sometimes be linked by common raw materials/technology/outlets.
Example: Today, this is uncommon but it was popular in the 1960s and 1970s. General Electric was founded as a lighting business and is now involved in aircraft, water, oil and gas, financial services, healthcare, energy, aviation, rail and software. It is a successful model because they conduct extensive market research and remain as market leaders in relevant industries.
