Business Growth

Question 1

How do businesses Grow

Answer 1

Internal/Organic
External/Inorganic

Question 2

How may business grow internally/externally

Answer 2

By being successful
Borrowing through issuing shares (equity)
Launching new products
Growing a customer base
Establish new distribution channels

Question 3

Limits to organic growth

Answer 3

Product market may be saturated - can only grow through the expense of other firms

May need to diversify

Question 4

How may businesses grow externally

Answer 4

Merging or acquiring with/other companies

Question 5

Advantages of external/inorganic growth

Answer 5

Rationalisation may occur
Instant access to increased economies of scale
Increase in market share - increased market power

Question 6

Three types of M+A

Answer 6

Horizontal
Vertical
Conglomerate

Question 7

What is a horizontal merger

Answer 7

Merger between firms operating in the same industry and at the same stage of the production process

Question 8

What is a Vertical Merger

Answer 8

Merging upstream or downstream along the production process

Question 9

What is backward integration

Answer 9

When a company merges with a supplier

Question 10

What is forward integration

Answer 10

When a company merges with a customer

Question 11

What may vertical integration allow

Answer 11

Rationalisation of the process of production

Question 12

What is a Conglomerate Merger

Answer 12

The merging of two firms that are operating in quite different markets or industries

Question 13

Arguments in favour of conglomerate

Answer 13

Reduce risks faced by firms

Question 14

Disadvantage of external/inorganic growth

Answer 14

Gains in market share attract attention of the regulator

Question 15

Advantages of organic growth

Answer 15

Lowest risk
Control of firm doesn’t change
Firms can build on existing strengths
Continue to meet expectations
Good for workers morale - increased job opportunities (uncreased scope for management roles)

Question 16

Disadvantages of organic growth

Answer 16

Tends to be slow
Building on existing knowledge of existing workers

Question 17

Advantages of a conglomerate merger

Answer 17

Diversified portfolio of production activities - leave firm less vulnerable to recession

Cost savings

Question 18

Disadvantages of a conglomerate merger

Answer 18

Managerial diseconomies - do not understand all aspects of the new diversified business
Costs may be underestimated
Systems may not be compatible
Cultures may collide

Question 19

Why may firms demerge

Answer 19

Diseconomies of Scale
Managers may lose focus and control due to the growth of output
LR average costs may increase

Question 20

What is a demerger

Answer 20

When a firm splits up into 2 or more separate firms

Question 21

Consequences of a demerger

Answer 21

Maximisation of economies of scale
Increase shareholder value
Increased profits

Question 22

How may demergers occur

Answer 22

Due to the firm deciding to split up
Government making firms split up

Question 23

Impact of demergers on businesses

Answer 23

Makes the business smaller
Potential less market control
Potential less monopoly power
Potentially less profits

Question 24

Impact of demergers on workers

Answer 24

Some workers may lose out on their jobs
Some workers may gain promotion
If each firm becomes more efficient - job losses are likely

Question 25

Impact of demergers on consumers

Answer 25

Face short term problems - less familiarity with operations or a different name

Intended long term effect - More competition in the marker and therefore lower price and more choice for the consumer

Question 26

Advantages of Horizontal Integration

Answer 26

Internal economies of scale
Cost savings through rationalisation
Economies of scope
Reduces competition
Make entry barriers higher for potential rivals

Question 27

Disadvantages of horizontal integration

Answer 27

Diseconomies of scale
Reduced flexibility
Risk of destroying shareholder value
Risk of increased regulation

Question 28

Advantages of vertical integration

Answer 28

Control of the supply chain
Improved access to key raw materials
Increased control over retail distribution
Removing suppliers away from competitors

Question 29

Disadvantages of vertical integration

Answer 29

Fewer economies of scale due to production at different stages of supply

Create problems of communication and co-ordination

Diseconomies of scale

Question 30

What are Joint Ventures

Answer 30

When businesses join together to pursue a common project but remain separate in legal terms

Question 31

Limits of business growth

Answer 31

Increased regulation
Financing growth
Increased competition
If in niche markers - limits to scalability

Question 32

Define Organic Growth

Answer 32

When a business expands its own operations rather than relying on external takeovers and mergers

Question 33

Why do many mergers and takeovers fail

Answer 33

Huge financial costs of funding takeovers including deals that have relied on loan finance - leaves a big debt over

Integrating systems - companies might have different technology systems that are expensive or impossible to marry

Share Price - Rasing equity to find a deal may have a negative impact on a company’s share price

Clash of corporate cultures

Overpaying

Bad timing