3.1.2a/b - Business growth

Question 1

How do businesses grow?

Answer 1

o organic growth - Developing new product ranges
- Launching existing products directly into new international markets (e.g. exporting)
- Opening new business locations – either in the domestic market or overseas
- Investing in additional production capacity or new technology to allow increased output and sales volumes
o forward and backward vertical integration
o horizontal integration
o conglomerate integration

Question 2

Define organic growth

Answer 2

-Internal growth without resort to takeovers and mergers, often achieved through expanding the product range, selling into new countries and employing more workers.

Question 3

Pros of organic growth

Answer 3

+ The firm is able to keep control over their business and how it grows
- organic growth is slow and expensive?
Less risk than external growth (e.g. takeovers)

Can be financed through internal funds (e.g. retained profits)

Builds on a business’ strengths (e.g. brands, customers)

Allows the business to grow at a more sensible rate
- less attention from CMA

Question 4

Cons of organic growth

Answer 4

● Sometimes another firm has a market or an asset which the company would beunable to gain through organic growth. For example, integration would allow a European company to expand into the Asian market which it has no expertise in.
● Organic growth may be too slow for directors who wish to maximise their salaries.
● It will be more difficult for firms to get new ideas as they build on existing knowledge of current staff who may be unwilling to take on new ideas anyways.

Question 5

Define internal growth

Answer 5

Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses

Question 6

Define external growth/integration/inorganic growth

Answer 6

Integration is growth through amalgamation, merger or takeover. A merger or amalgamation is where two or more firms join under common ownership whilst a takeover is when one firm buys another.

• ebay and paypal are congolomerate merge, mars and wrigley
• forward vertical: live nation and ticketmaster, shell buying first utility
• backward vertical: tesco buys wholesaler booker for £4bn in 2018

Question 7

Pros of external growth

Answer 7

IGNORE

Question 8

Cons of external growth

Answer 8

• mergers lead to a clash of the different working cultures of the two firms therefore they are incompatible together (E.G products must match each toher)
• costs of merger can be underestimated
• reversing a merger can be acrimonious and costly
• computer and production systems may not be compatible,lack of synergy means expected gains in markets share/profit do not materialise

Question 9

Define horizontal integration

Answer 9

When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process.
- e.g merger between daimler benz and chrysler 1998
- amazon buying whole foods for $14bn
- Sports direct bought jack wills in 2019

Question 10

Define vertical integration

Answer 10

Vertical integration involves merging with a business in the same industry but at different stages of the supply chain.

Question 11

Define forward vertical integration

Answer 11

Acquiring a business further up the supply chain – e.g. a vehicle
manufacturer buys a car parts distributor; a brewing firm acquires a number of pubs

Question 12

Define backward vertical integration

Answer 12

Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler.

Question 13

Define conglomerate integration

Answer 13

A merger between firms in unrelated business, e.g., between a car
manufacturer and a food processing firm

Question 14

define diversification

Answer 14

Increasing the range of products or markets served by a business. The extent of diversification depends on the extent to which those products or markets are different from the existing products and markets served by the business

Question 15

Define hostile takeover

Answer 15

A takeover that is not supported by the management of the company being acquired - as opposed to a friendly takeover.

Question 16

Pros and cons of horizontal integration

Answer 16

• exploit EOs
• Cost saving due to rationalization of biz - often involves job losses to increase prod
• wider range of products creating chance for economies of scope
• reduce comp by removing one key rival - increase MS and lr pricing power
• buying existing well known bis is cheaper in the LR than organically growing a brand (B to entry) are higher
  BUT
• increase MS increase attention from CMA bc merger reduces comp and reduce consumer welfare (sainsbury and asda 2019 blocked)
• risk of DOS
• reduce flexibilitu bc more bureaucracy, red tape, transparency
• destroy shareholder value bc synergies never materialise

Question 17

Pros and cons of vertical integration

Answer 17

• firms gain more control over production process (maintain higher quality standard and make overall process more efficient)
• Control of the supply chain – this helps to reduce costs and improve the quality of inputs into the production process
• Improved access to key raw materials perhaps at the expense of rivals who must then pay more
• Better control over retail distribution channels e.g. pub companies who ensure that their beers and wines are sold in tenanted pubs and clubs
• Removing suppliers, and crucial information from competitors which helps to make a market less contestable
  BUT
• new problems of comms and coordination within bigger and more disparate firms. diseconomies of scale occurs

Question 18

Pros and cons of conglomerate integration

Answer 18

• firms can diversify operstions across industries so reducing risk of failure in downturns
• firms can benefit from increased revenue by expanding customer base and ms
• economies of scale bc they share resources and costs
• cross selling opportunities; leverage existing customers base to sell new products
• flexibility bc can adapt to market changes; downturn in one market increase focus in another
  BUT
  managerial diseconomies if the management team do not understand all aspects of the new diversified business
• costly as different activities require different skills and specialism