3.2 - business growth

Question 1

What are the main objectives of growth for businesses

Answer 1

• to increase profitability
• to increase market share
• to take advantage of economies of scale

Question 2

What is inorganic growth

Answer 2

Inorganic growth is when a business grows externally through methods such as mergers or takeovers.

Question 3

What is a merger

Answer 3

Mergers are when two businesses join together to form one business. The shares of the mergerd business are transferred to the shareholders of the old business.

Question 4

What is a takeover

Answer 4

Takeovers are when one business buys enough shares in another so that it has more than 50% of the total shares.

Question 5

What are the 2 types of inorganic growth

Answer 5

Horizontal integration - when a business combines with another business in the same industry or sector
Vertical integration - When a business combines with another business in the same industry but at a different stage of the production process.

Question 6

What is organic growth

Answer 6

organic growth is when a business grows from within, and doesn’t involve any other businesses. A business can come up with new strategies, sell new products, expand into new markets, open new stores etc.

Question 7

What are the advantages of organic growth

Answer 7

• can allow the business to maintain current management sytle, culture, ethics.
• less risk as its expanding what the business is good at and its usually financed using profits
• its easy for the business to manage organic growth and control how much the business will grow.
• less disruptive changes mean that workers efficiency, productivity and morale remain high.

Question 8

What are the disadvantages of organic growth

Answer 8

• It can take a long time to grow a business organically
• Market size isnt affected by organic growth
• businesses might miss out on opportunities for ambitious growth if they only grow organically

Question 9

What are some of the problems business can face from growth??

Answer 9

• large businesses can suffer from diseconomies of scale (unit costs increase as the scale of production increases)
• It can be hard to motivate people in a large firm
• Internal communication is harder in a big business, meaning less efficiency
• Overtrading is common in new businesses

Question 10

Why is quick inorganic growth risky?

Answer 10

• Businesses involved in mergers may have different objectives and cultures, which could lead to inefficiency
• The staff of merged businesses will need time to learn new procedures, which may lead to initial bad customer service.
• Inorganic growth can lead to duplicate roles, meaning some staff need to be made reduntant which brings the firm redundancy costs, which would reduce profitability.
• During a takeover the buyer business will take on any liabilities of the other business which could include any payments the other business owed.
• If the takeover is a different business completely, then the business will have little experience in the industry which could lead to mistakes being made.

Question 11

Why do some businesses not want to grow?

Answer 11

• They want to maintain the culture of the business
• The business will become more complicated and harder to manage as it grows
• Growth requires thje business to secure additional finanical resources which can be difficult