3.2.2 Inorganic growth Flashcards
Inorganic growth
Growth which occurs as a result of taking over or merging with another business.
Tactical reasons for inorganic growth
- Ensure an increase in market share.
- Access to technology.
- Access to staff.
- Access to intellectual property such as patents.
- Economies of scale.
- Cost and revenue synergies.
Strategic reasons for inorganic growth
- Access to new markets.
- Improved distribution networks.
- Improved brands.
Merger
A combination of two previously separate firms which is achieved by forming a completely new firm (mutual decision).
Synergy
When the value of two businesses brought together is higher than the sum of the two individual businesses.
Advantages of merging
+ Achieving economies of scale (cost synergies - additional cost savings if larger).
+ Revenue synergies.
+ Market power.
+ Higher barriers to entry.
+ Increased market share - growth.
+ Combine expertise.
Disadvantages of merging
- Redundancies.
- Unsuccessful if brand are too different and don’t integrate well.
- Cultural differences makes it hard to integrate two businesses to work alongside one another.
Takeover
When one larger business buys the majority of the shares in another and therefore achieves full management control.
- Hostile = Takeover of a company whose management is actively against takeover deal.
- Friendly = Target company’s management and board of directors agree to be absorbed by acquiring company.
Advantages of takeovers
+ Reduces competition by removing key rivals.
+ Market power - enter new market segments.
+ Diversification.
+ Create higher barriers to entry.
+ Increased market share - growth.
+ Quick method of growth as control is clear.
+ Leverage expertise.
+ Increase overall dominance.
Drawbacks of takeovers
- High cost involved.
- May not have any experience of the market in which they are purchasing.
- Upset customers and suppliers as a result of disruption involved.
- Incompatability of management styles, structures and culture.
- Problems of integration (change management), including resistance from employees.
- High failure rate.
Integration
When two businesses join together.
Vertical forwards integration
Joining with a business further up in the supply chain.
Advantages and disadvantages of vertical forwards integration
+ Reduces costs of production as middlemen profits eliminated.
+ Manufacturers can determine how products are promoted and build relationships with end users.
+ Guaranteed outlet for products.
- Fewer economies of scale because production is at different stages of supply.
- Possible little expertise in running new firm results in inefficiencies.
- Many resources needed.
Vertical backwards integration
Joining with a business operating earlier in the supply chain.
Advantages and disadvantages of vertical backwards integration
+ Lower costs of supplies.
+ Quality of raw materials controlled.
+ Less risk as access to raw materials is more certain.
- Can tie business to supplier that may not always offer best option.
Horizontal integration
Joining with a business at the same stage of the supply chain.
Conglomerate integration
Where one business has no clear connection to the business buying it.
Advantages and disadvantages of conglomerate integration
+ Diversifies business - spreading risk into different markets.
+ Useful for firms where may be no room for growth in present market.
- No expertise - failure to understand market.
- May distract management from original business due to unfamiliarity and slowness to integrate.
Problems of rapid growth
- Strain on cash flow.
- Product quality and quality of customer service issues.
- Diseconomies of scale.
- Culture clash.
- Managers overloaded with new responsibilities.
- Shortage of resources.
- Employee burnout.
- Overtrading.
Financial risks of growth
- Integration costs.
- Bidding wars.
- Resistance from employees (redundancies).
- Cultural differences.
- Regulatory intervention e.g. CMA may take time and cost money.
Financial rewards of growth
- Speedy growth (large market share).
- Lower costs resulting from economies of scale.
- Increased profitability.
- Higher remuneration for senior staff (bonuses).
- Rewards to previous owners/shareholders.
