3.2 Flashcards
Organic Growth
A business growth strategy that involves a business growing gradually using its own resources.
Inorganic Growth
A business growth strategy that involves two or more businesses joining together to form one much larger one.
Overtrading
When a business experiences cash-flow problems as a result of expanding too quickly without sufficient cash in the bank.
Diseconomies of scale
The inefficiencies related to growing as a business that can lead to upward pressure on unit costs.
Examples of external economies of scale
Labour and Cooperation
Examples of internal economies of scale
Purchasing Managerial Technical Financial Risk-bearing
Merger
Where two firms of similar size agree to join forces permanently, creating a company that is twice the size of each predecessor.
Takeover
When one firm buys a majority of the shares in another and therefore achieves full management control.
Forward Vertical Integration
Joining with a business in the next stage of production.
Horizontal Integration
The joining of businesses that are in exactly the same line of business.
Backward Vertical Integration
Joining a business in the previous stage of production.
Backward Vertical Integration
Joining a business in the previous stage of production.
Conglomerate Integration
The joining of two unrelated businesses.
Advantages to Forward & Backward Vertical Integration
- Competitive advantage as you are reducing your competition.
- More control over production process.
- Better cost control.
Negatives to Forward & Backward Integration
- Decreasing the competition could lead to lack of innovation.
- Lack of competiton for suppliers can lead to higher costs.
- No guarantee of success.
- May be too safe.
Advantages to Conglomerate Integration
- More income
- Reach new customers
- Spreads risk
- Lowers chances of clash of culture as businesses are completely different.
Negatives to Conglomerate Integration
- More managers involved in decision making so can take longer to make a final decision.
- If the other business does something bad this can give your business a bad reputation as well.
- The business has no experience in your business and you don’t have experience in theirs so you cannot help each other very well.
Reasons for staying small
- Low barriers to entry
- Lower costs/overheads
- Convenience for local community
- Its easier to keep control and efficiency
- Owner preferences (owners may be happy with profits they are currently making)
Advantages to Horizontal Integration
- Increases market share
- More facilities and resources available to use.
Disadvantages to Horizontal Integration
- Communication issues
- Clash of culture
- Gets quite costly, as there is a duplication in roles. Which increases salary costs by a lot.
How small businesses survive in a large market
- Great customer service
- Flexibility in responding to customer needs
- E-commerce (working online)
- Product differentiation (selling in a niche market)
Methods of Organic growth
- New markets
- New products
- New business model
- New customers
- Franchising
What does expanding to New Markets mean
- Growing to new locations
- Possibly overseas
What does New products mean
- More research and innovation that may lead to the creation of new ideas.
