7. the growth of firms

Question 1

define internal growth

Answer 1

when a business grows from its own expansion, possibly due to an increase in sales

Question 2

what is external growth

Answer 2

when a firm grows through a merger or takeover of another business

Question 3

what is a merger

Answer 3

when two or more businesses agree to join forces to create a jointly integrated business

Question 4

what is a takeover

Answer 4

when one business buys out another business due to buying at least 51% of its shares, can be hostile

Question 5

what are the different types of integration

Answer 5

forwards verticle
backwards verticle
horizontal
conglomerate

Question 6

what is horizontal integration

Answer 6

merging or taking over a business in the same industry

Question 7

what is forwards and backwards verticle integration

Answer 7

merging or taking over a business in the same industry but the previous or next stage of the supply chain

Question 8

what is conglomerate/diversification integration

Answer 8

a merger or takeover of a business in a completely unrelated sector

Question 9

pros and cons of horizoontal integration

Answer 9

pros:
eliminates competition
economies of scale
increased market share and power
lower costs - no duplication of roles

cons:
expensive
different cultures between firms and trade unions may create delays
time consuming
government may make firm sell off assets - too much power

Question 10

pros and cons of verticle integration

Answer 10

pros:
ability to control raw material quality/sales centres
lower costs and prices of raw materials if firm owns its supplier

cons:
expensive
diseconomies of scales may occur becuase of communication and coordination problems between sectors
lack of focus on a sector

Question 11

pros and cons of internal growth

Answer 11

pros:
same philosophy and vision
less time consuming
no culture clashes
cheaper
growing at a manageable rate
100% of the profit

cons:
slow growth may be an issue
higher costs
obtain 100% of the risk
doesn’t eliminate competition

Question 12

pros and cons of external growth

Answer 12

pros:
quicker growth
increased sales and profits quicker
gaining expertise from eachother
lower costs
economies of scale
spreads the risk

cons:
expensive in the short term - convincing shareholders of the other firm to sell
doesn’t garuntee success
governments can prevent the firms growth due to potential monopoly power
shared profits