3.1.2 Business growth

Question 1

Organic growth definition?

Answer 1

• Organic growth builds on the business’ own capabilities and resources

Question 2

Limitations to organic growth?

Answer 2

• Product market may be saturated so can only grow at expense of other firms in the market

If competitors able to maintain own market shares, firms may need to diversify its production activities by finding new markets for its existing product or offering new products

Question 3

Why can diversification be a dangerous strategy?

Answer 3

• Firm’s moving into a marker which it’s inexperienced in
• Existing rivals already know the business

In this case, much depends on the quality of the management team

Question 4

Advantages of organic growth?

Answer 4

• Lowest-risk form of growth
• Control of firm remains unchanged
• Can continue to meet consumer expectations
• Good for workers’ morale
• More job opportunities with increased scope for management roles

Question 5

Disadvantages of organic growth?

Answer 5

• Slow
• Due to building on existing ideas, people might be unaware of new ideas/innovations/unwilling to take on new ideas that involve change

Question 6

External/Inorganic growth definition?

Answer 6

• Growth by merging with, or acquiring other firms

Merger - coming together of equals
Acquisition - a takeover (could be hostile)

Question 7

Horizontal merger?

Answer 7

• A merger between firms operating in the same industry at the same stage of production

e.g. Disney and Pixar

Question 8

Advantages of external/inorganic growth for horizontal mergers?

Answer 8

• Instant access to economies of scale
• Increased market share, and perhaps power (fewer independent firms operating in market now)

Question 9

Disadvantages of external/inorganic growth for horizontal mergers?

Answer 9

• Market share may attract the attention of the regulator
• Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles

Question 10

Vertical mergers?

Answer 10

• Backward integration: merging with a firm involved in an earlier part of production process
• Forward integration: merging with a firm involved in a later part of the production process

e.g. Netflix (streaming service and now produces own content)

Question 11

Advantages of external/inorganic growth for vertical mergers?

Answer 11

• Greater control over supply chain
• Less subject to interruptions in supply
• More control over the margins at each stage of production process

Question 12

Disadvantages of external/inorganic growth for vertical mergers?

Answer 12

• Possibly little expertise in running the new firm results in inefficiencies
• Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles

Question 13

Conglomerate mergers?

Answer 13

• Merging of two firms that are operating in quite different markets/industries

e.g. Amazon’s acquisition of Whole Foods Market

Question 14

Advantages of external/inorganic growth for conglomerate mergers?

Answer 14

• Diversified portfolio of production = less vulnerable to recession
• Possibility for cost savings if merged firms can find synergies in core business functions (e.g. financial accounting/marketing)

Question 15

Disadvantages of external/inorganic growth for conglomerate mergers?

Answer 15

• Possible lack of expertise in new products/industries = possible inefficiences = managerial diseconomies

Question 16

Possible reasons for unsuccessful mergers?

Answer 16

• Costs of integrating two diff firms underestimated
• Computer/production systems not compatible
• Corporate culture clashes

Once firms have merged, it’s costly and acrimonious to reverse the process by seperating

Question 17

Why do horizontal mergers affect the degree of market concentration?

Answer 17

• After the merger takes place, there are fewer independent firms operating in the market
• May increase the market power held by the new firm

Question 18

How does vertical integration allow rationalisation of the process of production?

Answer 18

• Allows firm to streamline its operations: improve efficiency and reliability of just-in-time process, reduces costs, increases productivity

Question 19

How do conglomerate mergers reduce risks faced by firms?

Answer 19

• By operating in a number of markets that are on different cycles
• Firm can even out its activity overall
• Less vulnerable to economic recessions

BUT: not necessarily efficient as diff activities may require diff skills and specialism and in recent years, conglomerate mergers less popular

Question 20

Reasons for demergers?

Answer 20

• Some firms may grow too large and experience diseconomies of scale
• Business and managers may lose focus and control over day-to-day management
• Long-run average costs may tend to increase
• Some demergers required by governments when business is acting against public interest

e.g. 2014 Lloyds TSB ordered by European Commission to demerge to Lloyds and TSB because receiving state aid during takeover of HBOS in 2009

Question 21

Impacts of demergers on businesses?

Answer 21

• Makes it smaller so possible reduction of market share and less monopoly power => could be less profitable
• Could be more profitable if effiency increases, able to concentrate on their specialist areas and maximise economies of scale

Question 22

Impacts of demergers on workers?

Answer 22

• Senior managers may gain promotion as if firm splits into two, more directors needed
• Job losses likely if each firm becomes more efficiently run

Question 23

Impacts of demergers on consumers?

Answer 23

Short-term problems:
* Change in name
* Changes in way it works
* Branches may close

Long term impacts:
* More competition in market = lower prices and more choice