3.1.2 Business growth Flashcards
Organic (internal) growth
Firms expand internally - by expanding its operations - rather than taking over or merging with other businesses
Examples of organic growth are:
-Lego - has never made an acquisition. It focuses on using new product development and innovation as the driver of revenues and profits. Since 2007, Lego has triples it revenues globally.
Advantages of organic growth
-Integration is expensive, time-consuming, and high risk.
- Firms are able to maintain control over business
Disadvantages of organic growth
Sometimes another firm has a market or an asset that which a company is unable to gain through organic growth. E.g. integration would allow a European company to expand into an Asian market which it has no expertise in.
Vertical integration
Merging with firms at different stages of the production process.
Forward vertical integration
A firm merges with a firm that is closer to consumers in the production process.
e.g. Coca-cola , the drinks maker, bought drinks retailer Costa in 2018.
Advantages of forward vertical integration
Forward integration secures retail outlets and can restrict access to these outlets for
competitors
Disadvantages of forward vertical integration
Firms may have no expertise in the industry they took over
Backward vertical integration
A firm merges with a firm closer that is closer to the raw materials in the production process.
e.g. a manufacturer buying a component supplier.
Advantage of backward vertical integration
Control over supply chains keeping costs low and allowing lower prices for consumers.
Disadvantage of backward vertical integration
Mergers can often create new problems of communication and coordination within the bigger more disparate firm.
Horizontal integration
Firms merge at the same stage of the production process.
E.g. House of Fraser bought Sport direct in 2018 (both retailers).
Advantage of horizontal integration
This helps to reduce competition, gain economies of scale, increases market share.
Disadvantages of horizontal integration
Risk of diseconomies of scale from the enlarged businesses especially if there are clashes of management style and culture, and wider problems with integrating businesses that operate in very different ways
Conglomerate integration
Merging between firms in unrelated industries.
Advantages of conglomerate integration:
Diversification
-By diversifying into different industries, it is able to spread risk and reduce its dependence on its current industries. This protect businesses from downturns in the existing industries they are already in.
Knowledge transfers
-Conglomerate integration allows firms to share expertise between one another which helps promote dynamic efficiency. This enhances productive potential enabling them to create newer products. Innovation leads to new streams of revenue.
Disadvantages of conglomerate integration
Limited synergies
-There may be limited synergies between diverse operations. Businesses operating in unrelated industries often have vastly different operational processes. This lack of operational synergies may lead to higher costs in order to set up new supply chains.
Complexity of managing unrelated businesses
-There is a risk of going into a market where they have little-to-no expertise. Integration requires a thorough understanding of different management process and market strategies. This may lead to poor performance.
- Size of market - constraint to business growth
The size and growth potential of the target market can limit a business’s expansion. If the market is small or saturated, it may be challenging to achieve substantial growth.
- Access to finance - constraint to business growth
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 - constraint to growth
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 - constraint to business growth
In some markets, the government may introduce regulation or there may be industry- specific rules, which
prevents businesses from growing e.g. in the UK the Competition and Markets Authority (CMA) may decide to block a merger between two firms if they provide sufficient evidence that the merger/takeover would lead to a substantial lessening of competitive pressure in a market.
