3.1.2: Business Growth

Question 1

What is organic growth?

Answer 1

• Refers to a business growing gradually with their own resources

Question 2

What are some methods of organic growth?

Answer 2

• Getting new customers
• Producing new products
• New markets
• Franchising

Question 3

What is franchising?

Answer 3

• Franchising is a business relationship in which an owner (franchisor) licences its operations to a third party (franchisee).

Question 4

What are some advantages of organic growth?

Answer 4

• Business owners can maintain control over their business
• Low risk, as the business can retain its culture and values, without interference of stakeholders
• Less likely to experience diseconomies of scale

Question 5

What are disadvantages of organic growth?

Answer 5

• Can take along time to grow internally
• Can take a while for a business to adapt to big changes in the market
• Sometimes another firm has a market or an asset, which would be unable to obtain through inorganic growth. eg, integration would allow a European company to expand into an Asian market which they have no expertise in.
• The business may get left behind their competitors, if their competitors are growing inorganically

Question 6

What are the types of external growth?

Answer 6

• Mergers
• Takeovers

Question 7

What is a merger?

Answer 7

• A merger is when two businesses join together for mutual benefit.

Question 8

What is an acquisition/ takeover?

Answer 8

• When one business acquires another and all of its assets

Question 9

What is a horizontal merger?

Answer 9

• Merging with another business in the same level of supply chain
• eg Direct competitors

Question 10

What are some advantages of horizontal mergers/ horizontal integration?

Answer 10

• Reduces competition and increases market share, giving firms more power to influence markets
• Firms will be able to specialise and rationalise, which reduces the area of the businesses that are duplicated
• The merger is more likely to be successful, as the business is able to grow in a market where they already have expertise in

Question 11

What are some disadvantages of a horizontal merger/ horizontal integration?

Answer 11

• Increases risk for that business, as if that market fails, they have nothing to fall back on.
• Could start the creation of a monopoly.
• Culture clash/ integration difficulties could occur

Question 12

What is forward vertical integration?

Answer 12

• Forward vertical integration is when a business takes control during the later stages in the production process while continuing to manage earlier stages.

Question 13

What are some advantages of forward vertical integration?

Answer 13

• Increased revenue, as the company have more control of the distribution chain.
• Reduced menu costs, due to control of supply chain
• Removing suppliers and taking market intelligence away from competitors which lowers competition from other firms

Question 14

What are some disadvantages of forwards vertical integration?

Answer 14

• They have fewer economies of scale as production is at different stages of supply
• Could lead to diseconomies of scale if the new bigger firm is ineffiecient

Question 15

What is a backwards vertical merger/ backwards vertical integration?

Answer 15

• When a business takes control of the level of supply chain in the earlier stages of production

Question 16

What are some disadvantages of backwards vertical integration?

Answer 16

• Increased Bureaucracy: As companies grow and grow vertically, the structure becomes more bureaucratic, which can slow decision making and reduce agility
• Culture Clashes
• High Capital Investment: Acquiring suppliers often requires significant capital outlays, which can strain a company’s financial resources. This can be more challenging for smaller companies

Question 17

What are some advantages of backwards vertical integration?

Answer 17

• Reduced menu costs, which can lead to lower costs for consumer or higher margins for profit for firms.
• Improved Quality Assurance, as the firms have more control over the supply chain and their goods
• Competitive Advantage as they have better market intelligence

Question 18

What is conglomerate integration?

Answer 18

• Where a company acquires another business in a completely different market

Question 19

What are the two types of conglomerate integration?

Answer 19

• Pure Conglomerate Integration
• Mixed Conglomerate Integration

Question 20

What is pure conglomerate integration?

Answer 20

• This occurs when the acquired companies have no significant relationship with the acquiring company’s existing business operations.

Question 21

What is mixed conglomerate integration?

Answer 21

• This involves acquiring companies that may have some operational or strategic synergies with the acquiring company’s existing businesses, but still operate in different industries or markets.

Question 22

What are some advantages of conglomerate integration?

Answer 22

• Diversification of risk: a conglomerate can spread its risk. Poor performance in one industry can be offset by better performance in another, stabilizing overall financial performance.
• Market Power: Larger conglomerates may have increased market power and financial resources, making it easier to raise capital.

Question 23

What are some disadvantages of conglomerate integration?

Answer 23

• Cultural Differences: Integrating companies from different industries can result in cultural clashes
• Complex Management and Coordination: Managing a diverse set of businesses can be complex and challenging

Question 24

What are some constraints of business growth?

Answer 24

• Size of the market
• Access to finance
• Owner Objectives
• Regulation

Question 25

How is the size of the market a constraint of business growth?

Answer 25

• 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.
• In particular, niche markets and markets for luxury items or restricted prestige markets make it difficult for businesses to grow.

Question 26

How is access to finance a constraintof business growth?

Answer 26

• 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 be shareholders, they will not be able to use retained profits to grow.
• Banks may be unwilling to lend firms money, especially to smaller business.
• As a result, firms will be unable to grow ad thy can’t finance their growth.

Question 27

How are owner objectives a constraint to business growth?

Answer 27

• 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.

Question 28

How is regulation a constraint to business growth?

Answer 28

• Governments may introduce regulation which prevents businesses from growing.
• eg 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.