3.1.2 - Business Growth

Question 1

What Are The 2 Types Of Business Growth?

Answer 1

~ Organic (Internal).

~ Inorganic (External).

Question 2

Describe Organic (Internal) Growth
(2 Points)

Answer 2

~ When a firm grows by increasing their output, E.g. Apple investing heavily into research.

~ E.g. Opening new stores, increased investment on technology, hire more labour, diversifying products.

Question 3

What Are The Benefits Of Organic Growth?
(4 Points)

Answer 3

~ Less risky, as it allows a business to maintain full control over its operations.

~ The pace of growth is manageable.

~ Lower financial risk, as growth is financed by reinvested profits.

~ Encourages firms to innovate, leading to a more competitive firm.

Question 4

What Are The Drawbacks Of Organic Growth?
(4 Points)

Answer 4

~ Access to finance may be limited.

~ High initial costs, due to investment in new product development and marketing campaigns.

~ Resource constraints, as organic growth relies heavily on the companies existing resources.

~ Pace of growth can be frustrating for directors who wish to maximise their salaries.

Question 5

Describe Inorganic (External) Growth
(2 Points)

Answer 5

~ Growth that occurs as a result of mergers or takeovers rather than its own operations, E.g. Google.

~ E.g. Forward vertical integration, backward vertical integration, horizontal integration and conglomerate integration.

Question 6

What Is A Merger?

Answer 6

Occurs when 2 firms combine to create a new firm.

Question 7

What Are The Benefits Of A Merger?
(4 Points)

Answer 7

~ EOS, as larger firms can spread their fixed costs over a larger output.

~ Synergy of combining operations.

~ Increased market share.

~ More resources to innovate.

Question 8

What Are The Drawbacks Of A Merger?
(4 Points)

Answer 8

~ Job losses to achieve costs savings.

~ Cultural clashes.

~ Financial strain, due to finance through borrowing.

~ Impacts innovation, due to less incentive with reduced competition.

Question 9

What Is A Takeover?

Answer 9

One company makes a bid (51% of shares) to acquire control over another company.

Question 10

What Are The Benefits Of A Takeover?
(4 Points)

Answer 10

~ EOS, due to cost efficiency of combining operations.

~ Synergies, performing better together.

~ Increase market share, making it a more dominant player in the market.

~ Reduced competition, due to potential purchase of a competitor.

Question 11

What Are The Drawbacks Of A Takeover?
(4 Points)

Answer 11

~ Job losses, due to overlapping functions.

~ Cultural clashes.

~ High integration costs with aligning operations.

~ Distractions from core business.

Question 12

What Is Forward Vertical Integration?

Answer 12

Involves a merger or takeover with a firm further forward in the supply chain.

Question 13

What Is Backward Vertical Integration?

Answer 13

Involves a merger or takeover with a firm further backwards in the supply chain.

Question 14

What Are The Benefits Of Vertical Integration?
(4 Points)

Answer 14

~ Reduces costs of production, as firms can reduce the cost of negotiating contracts with suppliers.

~ Increased competitiveness, due to lower costs.

~ Improved supply chain coordination, leads to better quality control and efficient production process.

~ Can increase brand visibility.

Question 15

What Are The Drawbacks Of Vertical Integration?
(4 Points)

Answer 15

~ Cultural clashes, leading to conflicts and poorer communication.

~ Possible expertise reduction due to new market entrance, leads to inefficiencies.

~ Complex management required.

~ DEOS, as costs can increase.

Question 16

What Is Horizontal Integration?

Answer 16

A merger or takeover of a firm at the same stage of the production process.

Question 17

What Are The Benefits Of Horizontal Integration?
(4 Points)

Answer 17

~ EOS, due to producing on a larger scale.

~ Increased market share.

~ Reduces competition, if integrating with a competitor.

~ Access to new markets and customers.

Question 18

What Are The Drawbacks Of Horizontal Integration?
(4 Points)

Answer 18

~ Reduced competition, can result in a monopoly or oligopoly formation.

~ DEOS, can occur as costs may increase.

~ Culture clash between the 2 firms.

~ High costs, as it involves significant investment.

Question 19

What Is Conglomerate Integration?

Answer 19

Merger or takeover of firms in an entirely different industry.

Question 20

What Are The Benefits Of Conglomerate Integration?
(4 Points)

Answer 20

~ Risk spreading over different industries.

~ Enhanced market power, due to operating in different industries.

~ Access to new markets and customers.

~ Enhanced brand recognition.

Question 21

What Are The Drawbacks Of Conglomerate Integration?
(4 Points)

Answer 21

~ Possible lack of expertise.

~ DEOS, due to larger costs.

~ Cultural clashes.

~ Resource allocation issues.