3.1.2 - business growth Flashcards
what is organic growth
There are two main types of growth: internal/organic growth and integration. 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.
what are advantages of organic growth
● 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.
greater market share and profit, attracts more investors
what are disadvantages of organic growth
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.
what Is forward and backward vertical 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.
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.
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.
adv of vertical integrated growth
● 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.
disadvantages of vertical integrated growth
● 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.
Vertical integration has drawbacks, including increased capital requirements, reduced flexibility, and higher operating costs. Managing a vertically integrated business can be complex, and the lack of specialized knowledge in each stage of the supply chain may lead to inefficiencies.
what is horizontal integration
This is where firms in the same industry at the same stage of production integrate.
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.
JPmorgan and chase bank
what is horizontal integration
This is where firms in the same industry at the same stage of production integrate.
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.
advantages of horizontal integration
● 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.
economies of scale due to the firms being able to produce more
synergies
Disadvantages of horizontal integration
● 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’.
diseconomies of scale
costly as you need an invesment bank to combine assets
the firm may be recognised as a monopoly
what is 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.
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
advantages of CI
● It is useful for firms where there may be no room for growth in the present market.
● The range of products reduces the risk for firms and if a whole industry fails, they
will still survive due to the other parts of the business.
● It will make it easier for each individual part of the business to expand than if they
were on their own as finance can be easily obtained and managers can be transferred from company to company within the firm.
Disadvantages of CI
● The problem with this is that firms are going into markets in which they have no
expertise. It can often be damaging for the business.
what are the factors that limit growth In firms
● Size of the market: A market is limited to a certain size and so not all businesses are able to mass produce because their goods would not be bought by consumers. This can happen no matter how big the market is, and there will always be limits on growth. In particular, niche markets (specific products that few people want) and markets for luxury items or restricted prestige markets make it difficult for businesses to grow.
● Access to finance: Firms use two main ways to finance growth: retained profits and loans. If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow. Banks may be unwilling to lend firms money, particularly smaller businesses that they see as high risk. As a result, firms will be unable to grow as they can’t finance it.
● Owner objectives: Some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with growth.
● Regulation: In some markets, the government may introduce regulation which prevents businesses from growing. For example, the UK government regulates the number of pharmacies in a local area and an existing pharmacy can only expand by buying another company. Competition law, which prevents monopolies, can restrict growth as any merger which creates a company with more than a 25% market share can be forbidden from taking place.
