3.2 Business Growth Flashcards
Define Merger
A merger occurs when two or more companies combine to form a new company
Define Takeover
A takeover occurs when one company purchases another company, often against its will
Reasons for Mergers & Takeovers
- Strategic fit
- Economies of Scale
- Synergies
- Elimination of competition
- Shareholder value
Define Vertical integration
Refers to a merger/takeover of another firm in the supply chain/ different stage of the production process
Define Horizontal integration
A merger/ takeover of a firm at the same stage of production process e.g. ice cream manufacturer buys another ice cream manufacturer
Define Forward vertical integration
Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain
Define Backward vertical integration
Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain
Advantages of Vertical Integration
Reduces the cost of production as middleman profits are eliminated
Lower costs make the firm more competitive
Greater control over the supply chain reduces risk as access to raw materials is more certain
The quality of raw materials can be controlled
Forward integration adds additional profit as the profits from the next stage of production are assimilated
Forward integration can increase brand visibility
Disadv. of Vertical integration
Diseconomies of scale occur as costs increase, e.g. unnecessary duplication of management roles
There can be a culture clash between the two firms that have merged
Possibly little expertise in running the new firm results in inefficiencies
The price paid for the new firm may take a long time to recoup
Adv. of Horizontal Integration
The rapid increase of market share
Reductions in the cost per unit due to economies of scale
Reduces competition
Existing knowledge of the industry means the merger is more likely to be successful
The firm may gain new knowledge or expertise
Disad. of Horizontal integration
Diseconomies of scale may occur as costs increase, e.g. unnecessary duplication of management roles
There can be a culture clash between the two firms that have merged
Financial risks of Inorganic growth
Overpayment: If the acquiring company pays too much for the target company, it may not be able to recoup the investment through increased revenue or cost savings
Integration Challenges: Integrating two companies can be complex and costly (with potential disruptions to operations and loss of key personnel)
Cultural Differences: Mergers can result in clashes of company cultures leading to decreased productivity and loss of valuable employees
Regulatory Hurdles: Mergers may face opposition from regulators or other stakeholders
Debt: Acquiring companies may take on debt to finance the merger, which can increase the financial risk and reduce flexibility
Financial rewards of Inorganic Growth
Increased Market Share: By acquiring another company, an increase in market share may lead to increased sales revenue and profitability
Synergy: Mergers may result in cost savings through the elimination of duplicate functions and increased efficiency, leading to increased profitability
Diversification: Selling a wider variety of goods and services reduces the risks associated with selling a single product
Access to New Markets: Acquiring a company with a strong presence in a new market may result in a higher customer base and sales revenue
Increased Value: Mergers may increase the overall value of the combined company for shareholders
Problems caused by rapid growth
- Strain on cash flow
- Increased management complexities
- Quality control issues
- Customer service issues
- Culture clash
- Diseconomies of Scale
Define Organic growth
Organic growth is growth that is driven by internal expansion using reinvested profits or loans
Advantages of Organic Growth
The pace of growth is manageable
Less risky, as growth is financed by profits and there is industry expertise
Avoids diseconomies of scale
The management knows & understands every part of the business
Disadvantages of Organic Growth
The pace of growth can be slow and frustrating
Not necessarily able to benefit from economies of scale
Access to finance may be limited
Reasons why small firms exist
They offer a more personalised service and focus on building relationships with their customers (excellent customer service)
They are unable to access finance for expansion
They provide a product that is in a niche market - smaller market size but can be very profitable
By remaining small, there is a high ability to respond quickly to changing customer needs/preferences
Rapid growth can cause diseconomies of scale which can be difficult to deal with and so many owners choose to avoid these
Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing)
