3.1.2- Business Growth

Question 1

What is organic growth?

Answer 1

Where a firm grows by increasing their output

Question 2

What are the types of organic growth?

Answer 2

-market penetration
-market development
-product development
-diversification

Question 3

What is market penetration?

Answer 3

Growth in an existing market and with the same product, but increasing output

Question 4

What is an example of market penetration?

Answer 4

Shampoo firms convinced people to wash their hair more frequently

Question 5

What is market development?

Answer 5

Targeting different people towards the same product

Question 6

How can firms do market development?

Answer 6

Geographic expansion

Question 7

What is product development?

Answer 7

Developing a new product alongside the current in the existing market

Question 8

What is an example of product development?

Answer 8

Cherry coke and coke

Question 9

What is diversification?

Answer 9

Make something completely different for a brand new market you’ve never entered before

Question 10

What are the advantages of organic growth?

Answer 10

-integration is expensive + time consuming
-firm can keep control of their business

Question 11

What are the disadvantages of organic growth?

Answer 11

-sometimes another firm has a market or an asset which the company would be unable to gain through organic growth
-organic growth is slow
-difficult to get new ideas

Question 12

What are the types of takeovers?

Answer 12

-hostile
-friendly
-‘knight in shining armour’
-reverse

Question 13

What is a hostile takeover?

Answer 13

When they go on the stock market and buy all the shares

Question 14

How do you counter a hostile takeover?

Answer 14

-try to grow to become more expensive
-release more shares
-management buy out as a counter offer
-merge with another firm
-convince shareholders not to sell

Question 15

What is a ‘knight in shining armour’ takeover?

Answer 15

Company is close to insolvency so another company buys it and takes on the debt

Question 16

What is a reverse takeover?

Answer 16

When a big firm takes over a little firm and big firm ends up being called the little firm’s name, giving the firm a new brand value

Question 17

What is a merger?

Answer 17

When two or more firms join under common ownership

Question 18

What is vertical integration?

Answer 18

The same industry but at different stages in the production process

Question 19

What is an example of vertical integration?

Answer 19

Tesco’s £3.7bn takeover of Booker in 2018

Question 20

What are the types of vertical integration?

Answer 20

Forward and backward

Question 21

What are the advantages of vertical integration?

Answer 21

-increased potential for profit
-less risks as suppliers dont have to worry about buyers not buying and buyers don’t have to worry about suppliers not supplying
-can control the quality of supplies and ensure reliable delivery
-can keep costs low and allow lower prices
-can restrict access to competitors

Question 22

What are the disadvantages of vertical integration?

Answer 22

-may have no expertise in the industry
-diverts management focus

Question 23

What is horizontal integration?

Answer 23

The same industry at the same stage

Question 24

What is an example of horizontal integration?

Answer 24

AstraZeneca acquired ZS Pharma for $2.7bn, which gave them access to new compounds

Question 25

What are the advantages of horizontal integration?

Answer 25

-helps to reduce competition and increase market share
-firms can specialise and rationalise
-already have expertise

Question 26

What are the disadvantages of horizontal integration?

Answer 26

-increases risk if that market fails
-gov has regulations to prevent monopolies
-attracts scrutiny from gov’t regulation

Question 27

What is conglomerate integration?

Answer 27

Unrelated product area

Question 28

What are the advantages of conglomerate integration?

Answer 28

-useful when there’s no room for growth in present marker
-range of products reduces the risk
-easier for each individual part of the business to expand
-high risk, so potentially high reward

Question 29

What are the disadvantages of conglomerate integration?

Answer 29

-no expertise

Question 30

What is lateral integration?

Answer 30

to an unrelated product area but has some links to the core product

Question 31

What are the advantages of growth by acquisition?

Answer 31

-costs in the long run are smaller
-instant growth
-competition decreases
-increase in customer base
-synergistic effects
-increased self esteem of CEOs
-can protect scarce infrastructure

Question 32

Why are costs smaller in the long run after acquisition?

Answer 32

Can benefit from economies of scale , and can remove profits of other firms in the supply chain

Question 33

What are synergistic effects?

Answer 33

-combined firm improves teamwork, creativity, decision making, coordination+ control
-1+1=3
-greater output together

Question 34

Why is the self esteem of CEOs increasing an advantage?

Answer 34

Increased confidence so are bigger risk takers

Question 35

What are the disadvantages of growth by acquisition?

Answer 35

-business cultures clash
-management focus
-unable to manage different sectors
-customer rebellion may follow
-high costs in the short run
-takes time to integrate 2 businesses
-asymmetric information
-difficulty of due diligence + window dressing

Question 36

Why is management focus a disadvantage?

Answer 36

-may favour one firm in decision making
-focus is on acquisition so not focused on running the business
-double the amount of problems to focus on

Question 37

Why may customer rebellion follow after acquisition?

Answer 37

May not agree with the values of the acquired firm

Question 38

What is an example of customer rebellion after acquisition?

Answer 38

Cadbury and Green + Blacks

Question 39

What is the difficulty of due diligence and window dressing?

Answer 39

-have to check all details of the firm to reduce asymmetric information
-takes time + money
-will make their figures look attractive

Question 40

What are the constraints of business growth?

Answer 40

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