3.1.2 Business growth

Question 1

What is organic (or internal) growth?

Answer 1

Firms can grow by expanding the scale of their operations and gaining market share

Question 2

How is organic growth achieved?

Answer 2

• achieved by investing within the firm, such as by expanding operations, increasing labor, or enhancing fop.

Question 3

How can organic growth be financed?

Answer 3

financed by reinvesting profits back into the firm or by borrowing, like taking out loans or issuing more shares.

Question 4

What are some methods firms use to grow organically?

Answer 4

Firms grow organically by gaining market share, product diversification, opening new stores, expanding internationally, and investing in new technology or machinery.

Question 5

What is an example of a company that has grown organically?

Answer 5

LEGO is an example; they introduced new products like Lego Friends and board games to reach a broader customer base.

Question 6

What is inorganic growth?

Answer 6

Inorganic growth occurs when firms grow through takeovers and mergers, rather than expanding their own operations internally.

Question 7

What is a takeover?

Answer 7

A takeover is when one firm buys another, which then becomes part of the acquiring firm.

Question 8

What is a merger?

Answer 8

A merger is when two firms unite to form a new company, combining their resources and operations.

Question 9

What is integration in the context of firm growth?

Answer 9

Integration refers to growth through amalgamation, merger, or takeover.

Question 10

What is horizontal integration?

Answer 10

a merger between two firms in the same industry and at the same stage of production.

Question 11

What are the main types of firm integration?

Answer 11

The main types are:
- vertical integration (forward or backward)
- horizontal integration
- conglomerate integration.

Question 12

Why do firms choose horizontal integration? (3)

Answer 12

• achieve eos
• increase market share
• reduce comp in their industry

Question 12

Can you give an example of horizontal integration?

Answer 12

• the proposed 2018 merger between Sainsbury’s and Asda
• Comcast’s acquisition of Sky in 2018
• Sports Direct buying House of Fraser in 2018.

Question 13

What is vertical integration?

Answer 13

the merger of two firms at different stages of the same industry or production process, typically involving firms connected to the same final product.

Question 14

Why do firms pursue vertical integration?

Answer 14

• increase barriers to entry
• gain control over suppliers and markets
• ensure a smoother production process
• maintain quality standards
• improve efficiency.

Question 15

How does vertical integration create barriers to entry?

Answer 15

by preventing competitors from accessing essential suppliers or retailers = making it harder for new firms to enter the market.

Question 16

What are barriers to entry?

Answer 16

• obstacles that prevent companies from entering a market or industry, which can include legal barriers like permits or patents or firm-created barriers such as advertising, brand loyalty, or technical expertise.

Question 17

What is forward vertical integration?

Answer 17

Forward vertical integration involves merging with or taking over a firm further along in the supply chain, closer to the final consumer.

Question 18

What are the advantages of forward vertical integration?

Answer 18

Advantages include greater access to customers, reduced supply costs, assured supply timing and quality, widened expertise, promotion opportunities, and potential price increases over time.

Question 19

What is backward vertical integration?

Answer 19

Backward vertical integration involves merging with or taking over a firm at a previous stage in the supply chain, closer to raw materials.

Question 20

How does backward vertical integration benefit a firm?

Answer 20

It provides control over raw materials, enhances supply reliability, reduces dependency on external suppliers, and can reduce costs in the production process.

Question 21

What is conglomerate integration?

Answer 21

Conglomerate integration is a merger between firms in entirely unrelated industries.

Question 22

Can you give an example of conglomerate integration?

Answer 22

An example is a merger between an educational stationery supplier and a tractor manufacturer

Question 23

What is the primary purpose of conglomerate integration?

Answer 23

The primary purpose is to diversify and spread risk across various businesses, reducing reliance on a single market.

Question 24

How does conglomerate integration improve financial stability?

Answer 24

Profits from one business can be used to invest in another, allowing for cross-subsidization and greater financial stability.

Question 25

What is one advantage of conglomerate integration in terms of risk?

Answer 25

It reduces vulnerability to market fluctuations, as the firm has revenue streams from multiple, unrelated industries.

Question 26

How does conglomerate integration support innovation?

Answer 26

Firms can use profits from stable businesses to invest in new areas, enabling innovation without risking their primary revenue sources.

Question 27

Who is a notable pioneer of conglomerate integration in the UK?

Answer 27

Richard Branson, with Virgin, is known for diverse investments and entrepreneurship across multiple industries.

Question 28

What is an example of a conglomerate company outside the UK?

Answer 28

Samsung is a well-known conglomerate, involved in electronics, military hardware, apartment construction, shipbuilding, and operating a Korean amusement park.

Question 29

What are constraints on business growth?

Answer 29

Constraints on business growth are factors that hold back firms from expanding, including regulation, finance, owner objectives, and market size.

Question 30

How do competition regulations limit business growth?

Answer 30

Competition regulations, like those enforced by the UK CMA, aim to prevent monopolies by blocking mergers that lessen competition and harm consumer welfare.

Question 31

How are firms selling demerit goods regulated?

Answer 31

Firms selling demerit goods are limited by policies such as age restrictions, minimum prices, and indirect taxes, which aim to reduce harm to consumers.

Question 32

Can specific market regulations prevent business expansion?

Answer 32

Yes, specific regulations, like the UK’s control over pharmacy numbers, prevent new stores from opening unless through acquisitions.

Question 33

Why can finance be a constraint on business growth?

Answer 33

Firms depend on retained profits and loans for growth. Insufficient profits, high shareholder payouts, or reluctant banks make financing harder, especially for smaller, high-risk businesses.

Question 34

Why do small firms face difficulties accessing loans?

Answer 34

Small firms are often seen as higher risk, so banks are less likely to lend to them or may charge higher interest rates if they do.

Question 35

How do owner objectives limit business growth?

Answer 35

Some owners may avoid growth to prevent additional risk and workload, or they may grow their business only to a level that ensures a comfortable lifestyle.

Question 36

How does market size limit business growth?

Answer 36

Businesses in local or niche markets have limited scalability due to a smaller consumer base, which restricts economies of scale and mass production.

Question 37

Why might large firms need to expand internationally to grow?

Answer 37

Large firms often reach saturation in domestic markets, so they expand internationally to increase market size and consumer demand.

Question 38

advantages of organic growth

Answer 38

- Lowest risk growth: Financing through profits reduces external financial risks, making it a safer growth strategy. - Expertise in the industry: Utilizing existing knowledge allows for efficient and targeted expansion, crucial for sustaining growth. - Unchanged control: Keeping control within the firm lets it leverage strengths and maintain customer loyalty. - Avoids diseconomies of scale: Maintains manageable growth pace and operational efficiency.

Question 39

disadvantages of organic growth

Answer 39

- Reliance on existing knowledge: hinder openness to new ideas or innovations, potentially stifling growth and adaptability in a changing market. - Venturing into unfamiliar markets: Lack of expertise in new areas can lead to damaging outcomes, making expansion riskier. - Slow and frustrating pace of growth: Organic growth typically takes time, which can be frustrating and may not meet market demands quickly enough.

Question 40

advantages of inorganic growth

Answer 40

- Rapid increase of market share: Quick expansion can enhance competitiveness and visibility in the market. - Reduction in cost per unit due to economies of scale: This leads to cost efficiencies, particularly through bulk buying and improved operational efficiency. - Acquisition of new knowledge or expertise: Merging or acquiring firms can bring in valuable skills and insights, enhancing overall capabilities.

Question 41

disadvantages of inorganic growth

Answer 41

- Diseconomies of scale may increase costs: Unnecessary duplication of management and resources can lead to increased expenses. - Culture clash between merged firms: Differing corporate cultures can create friction, undermining the success of the merger. - Increased risk due to market dependency: Heavy investment in new markets can be risky if those markets do not perform well, leading to potential financial losses.

Question 42

advantages of vertical integration

Answer 42

- Reduces cost of production: Eliminating middleman profits enhances competitiveness and lowers overall costs. - Greater control over the supply chain: This reduces risk and ensures access to high-quality raw materials, enhancing production reliability. Increased profit potential: - Controlling more of the production chain can lead to lower unit costs and better input quality, ultimately boosting profitability.

Question 43

disadvantages of vertical integration

Answer 43

- Diseconomies of scale may occur: Increased costs can arise from duplicating management roles or inefficient operations. - Lack of expertise in running the new firm: This can lead to operational inefficiencies and challenges in managing different aspects of the supply chain. - Communication and coordination problems: These can result from integrating different stages of production, leading to potential inefficiencies.

Question 44

advantages of conglomerate integration

Answer 44

- Reduces risk of business failure: By diversifying into different industries, firms can withstand downturns in specific markets. - Easier expansion of individual parts: Access to finance and the ability to transfer management expertise across the conglomerate can facilitate growth. - Increased size and connections: Expanding into new industries opens up additional opportunities for growth and diversification.

Question 45

disadvantages of conglomerate integration

Answer 45

- Possible lack of expertise in new products/industries: Entering unfamiliar markets can lead to challenges and inefficiencies, potentially harming the business. - Diseconomies of scale can develop: As the conglomerate grows, inefficiencies can arise from managing diverse operations. - Job losses and worker dissatisfaction: Mergers and takeovers can lead to layoffs and lower morale, negatively impacting productivity.