3.1.2 - Business Growth Flashcards
How Businesses Grow, Advantages and Disadvantages of Organic Growth, Types of Inorganic Growth
What is Organic Growth in a Business? (Internal Growth)
When Firms grow by expanding production through increasing output, widening customer base, developing new products, or diversifying their range, etc.
What other methods may firms use to grow organically? (2)
- Firms may use market penetration to sell more of their products to existing customers
- Firms may also invest in R&D, Tech or Prod. Cap.
Give an example of a firm that has grown substantially via organic growth? (2)
- Apple
- Its innovations like iPads and iPhones, have greatly increased its market share in the tech industry.
What is Inorganic Growth? (External Growth)
Where firms grow through merging with, acquiring or taking over another firm.
Give an example of a firm that has grown substantially via inorganic growth? (2)
- Its various acquisitions of firms such as WhatsApp and Oculus VR have allowed Facebook to strengthen its position in the Tech industry and diversify its services.
What are the Advantages of Organic Growth? (3)
- Lower Risk - less risky than inorganic growth
- Based on Strengths - Uses their own funds, meaning firms do not build up debt, and growth is sustainable.
- Retention of Control - reduces conflicts in objectives that are possible in takeovers.
What are the Disadvantages of Organic Growth (2)
- Long Term - slow, may mean that firm falls behind competition that is expanding inorganically.
- Relies on Current Market Situation - limits scale of growth if the market is in a downturn
What is Forward Vertical Integration? (2)
- Involves taking over a distributor
- e.g. a coffee producer might buy the café where the coffee is sold
What is Backward Vertical Integration? (2)
- Involves gaining control of suppliers
- e.g. a coffee producer might buy a coffee bean farm
What are the Advantages of Vertical Integration? (3)
- Efficiency - Firms gain economies of scale, which could reduce their average costs.
- Market Control - More control of their market, e.g. Backwards Integration means that firms can achieve a cost advantage over their competitors.
- Certainty - more certainty over production, with factors such as quality, quantity and price.
What are the disadvantages of Vertical Integration? (2)
- Diseconomies of Scale - Firm may become too big too quickly, and encounter various difficulties in organisation
- Less Competition - Can create barriers to entry, leading to a less competitive/efficient market, where the firm has no incentive to cut costs due to high market share.
What is Horizontal Integration? (2)
- The merger of two firms in the sae industry and the same stage of production.
- e.g. if a car manufacturer merges with another car manufacturer, they will have horizontally integrated
What are the Advantages of Horizontal Integration (3)
- Quick - Firms grow quickly, giving them a competitive adv. over other firms in market.
- Economies of Scale - Firms can increase output quickly, so they can take adv. of EoSs
- Synergy - two firms have expertise in the same industry, so the merged firm can gain advantages, such as in Marketing.
What are the Disadvantages of Horizontal Integration? (4)
- Legal Repercussions - Firm may incur penalties if it is deemed a monopoly post-merger
- Diseconomies of Scale - organisation becomes less flexible as it becomes larger
- Conflict of Objectives - Disagreements in the objectives of the two firms which merged
- Monopoly Power - firm becomes less efficient due to it’s larger market share
What is Conglomerate Integration? (2)
- Combining of two firms with no common connection.
- e.g. Associated British Foods owns Primark, a fashion retailer.
What are the Advantages of Conglomerate Integration? (3)
- Synergy - It can help both firms become stronger in their respective markets, than if they were individual.
- Greater Sales - Conglomerates can reach out to a wider customer base, market competition could be reduced.
- Economies of Scale - The Advs. of EoSs, particularly risk bearing EoSs, can be considered.
What is the disadvantage of Conglomerate Integration? (2)
Diversification Risk
- There is a risk of spreading the product range too thinly
- This may reduce quality and increase production costs.
How might the size of the market constrain business growth? (2)
- In small markets, Firms can only access a limited consumer market and there may be limited opportunities for innovation and expansion.
- Larger markets, such as for mobile phones, have a much wider scope for innovation, and firms can take advantage of huge selling opportunities.
How might access to finance constrain business growth? (3)
- Smaller, newer firms tend to be less able to get access to finance, as they are deemed riskier than established firms.
- Banks have become more risk averse since the global financial crisis, limits on size/number of loans on the market.
- Without sufficient access to credit firms cannot invest and grow, and firms cannot innovate as much.
How might Owner Objectives constraint Business Growth? (3)
- Owners may have different objectives aside from Business Growth
- Philanthropic Owners might aim to maximise social welfare
- Others seek to profit maximise or achieve bigger personal gains via bonuses/reputation.
How might Regulation (Red Tape) constrain Business Growth? (3)
- Can limit quantity of output that a firm produces
- e.g. environmental laws and taxes force firms to only produce a certain quantity before they exceed a pollution permit.
- e.g. high rates of corporation tax might discourage firms from becoming large enough to earn profits at a specific level.
