3.1.2 - Business growth

Question 1

Spec - Blurt all the ways business grow

Answer 1

o Organic growth
o Forward and backward vertical integration
o Horizontal integration
o Conglomerate integration

Question 2

Blurt everything you know about Organic growth

Answer 2

• Occurs when a business grows by reinvesting their profits into their business. To increase output.
• Can happen due to : Increased output, expanding into international markets ect.
• Avantages :
  1. Reduced risk of enduring any of the detrimental effects that may occur during mergers and takeovers e.g. a clash of business cultures.

2. Helps to avoid diseconomies of scale as it allows the business to grow at a more sustainable pace. As a result of this, there is less chance of the business experiencing increased costs as a result of diseconomies of scale.

Disadvantages :
1. Slow growth– The reduction in the rate of growth can also be a disadvantage. By growing organically it will take longer for the business to increase its market share, by which point their competitor that has grown through a merger/takeover may be dominating the market.

Question 3

What is inorganic growth

Answer 3

When a firm grows by merging or acquiring other business

Question 4

Name the type of inorganic growths

Answer 4

• Backwards and Forwards vertical integration.
• Horizontal integration
• Conglomerate

Question 5

What is Forward and backward vertical integration

Answer 5

• business merges or takes over another business that is in the same industry but different stage of production from them.
• Vertical forward integration : Merging or taking over of a firm that is a stage ahead of the business in the production process.
• Backwards vertical integration : When a business takes over or merges with another business that is a step behind (closer to raw.materials) them in the production process

Question 6

Advantages of Forward and backward vertical integration

Answer 6

B - Greater control over supply chain : If a business were to merge or takeover a firm a stage behind them in the production process they are able to control the supply of their products. This could also prevent competition.

May experience economies of scale, which will increase profits.

Question 7

Disadvantages of Forward and backward vertical integration

Answer 7

• Regulation : E.g ofgem prevents energy firms from merging as this will reduce comp, exploiting people w higher prices. Regulators impose huge fines.
• May grow to big, and experience diseconomies of scale. Which increase LRAc and reduce its profits.
• May lack expertise which reduce productivity increasing cost and decreasing profits.

Question 8

What is Horizontal integration

Answer 8

• When a business merges/integrates with a business in the same industry and same production process as them.

Question 9

Advantages of Horizontal integration

Answer 9

• This helps to reduce competition as a competitor is taken out and increases
  market share, giving firms more power to influence markets.
• Internal economies of scale. e.g (risk bearing, managerial, financial, purchasing, technical and marketing)
• Rationalisation, when firms reorganise to avoid duplicated costs (e.g. only one accounting team will now be needed, not two).

Question 10

Disadvantages of Horizontal integration

Answer 10

• Diseconomies of scale.
• Brand dilution which may push brand loyal customers away.
• Rationalisation can lead to job losses because duplicated departments will be fired.

Question 11

What is Conglomerate integration

Answer 11

Firms in different industries integrate.

Question 12

Advantages of conglomerate integration

Answer 12

• Risk bearing internal economies of scale.
• It is useful for firms where there may be no room for growth in the present market.

Question 13

Disadvantages of conglomerate integration

Answer 13

• Communication economies of scale.
• Brand dilution which may push brand loyal customers away.
• Lack of knowledge – Entering a new market can be extremely risky if the business owner does not have experience or expert knowledge of the market. As a result of this, they may make poor decisions and are unable to attract new customers.

Question 14

Blurt all the constraints on business growth.

Answer 14

o size of the market
o access to finance
o owner objectives
o regulation

Question 15

Blurt everything you know about size of the market.

Answer 15

Businesses may operate in small or niche markets, meaning that the demand for their goods/services will be limited. As a result of this, there is little room for the business to expand and therefore there is less chance of them experiencing economies of scale.

Question 16

Blurt everything you know about Access to finance

Answer 16

• 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.
• The start-up or small businesses are much more of a risk than established businesses. This is for a number of reasons such as the ability for larger businesses to diversify their product range and operate in a number of different markets.

Question 17

Blurt everything you know about Owners objectives

Answer 17

The business owner may not have the objective of growth. For example, instead they may aim for corporate social responsibility. By doing so they may increase their costs of production, thus reducing their profit margins and therefore potentially they’re overall profit. This may also constrain their business from growing.

• 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 18

Blurt everything you know about Regulation

Answer 18

• In some markets, the government may introduce regulation which
  prevents businesses from growing.

Question 19

Answer 19