Business Growth Flashcards
How do businesses Grow
Internal/Organic
External/Inorganic
How may business grow internally/externally
By being successful
Borrowing through issuing shares (equity)
Launching new products
Growing a customer base
Establish new distribution channels
Limits to organic growth
Product market may be saturated - can only grow through the expense of other firms
May need to diversify
How may businesses grow externally
Merging or acquiring with/other companies
Advantages of external/inorganic growth
Rationalisation may occur
Instant access to increased economies of scale
Increase in market share - increased market power
Three types of M+A
Horizontal
Vertical
Conglomerate
What is a horizontal merger
Merger between firms operating in the same industry and at the same stage of the production process
What is a Vertical Merger
Merging upstream or downstream along the production process
What is backward integration
When a company merges with a supplier
What is forward integration
When a company merges with a customer
What may vertical integration allow
Rationalisation of the process of production
What is a Conglomerate Merger
The merging of two firms that are operating in quite different markets or industries
Arguments in favour of conglomerate
Reduce risks faced by firms
Disadvantage of external/inorganic growth
Gains in market share attract attention of the regulator
Advantages of organic growth
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)
Disadvantages of organic growth
Tends to be slow
Building on existing knowledge of existing workers
Advantages of a conglomerate merger
Diversified portfolio of production activities - leave firm less vulnerable to recession
Cost savings
Disadvantages of a conglomerate merger
Managerial diseconomies - do not understand all aspects of the new diversified business
Costs may be underestimated
Systems may not be compatible
Cultures may collide
Why may firms demerge
Diseconomies of Scale
Managers may lose focus and control due to the growth of output
LR average costs may increase
What is a demerger
When a firm splits up into 2 or more separate firms
Consequences of a demerger
Maximisation of economies of scale
Increase shareholder value
Increased profits
How may demergers occur
Due to the firm deciding to split up
Government making firms split up
Impact of demergers on businesses
Makes the business smaller
Potential less market control
Potential less monopoly power
Potentially less profits
Impact of demergers on workers
Some workers may lose out on their jobs
Some workers may gain promotion
If each firm becomes more efficient - job losses are likely
Impact of demergers on consumers
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
Advantages of Horizontal Integration
Internal economies of scale
Cost savings through rationalisation
Economies of scope
Reduces competition
Make entry barriers higher for potential rivals
Disadvantages of horizontal integration
Diseconomies of scale
Reduced flexibility
Risk of destroying shareholder value
Risk of increased regulation
Advantages of vertical integration
Control of the supply chain
Improved access to key raw materials
Increased control over retail distribution
Removing suppliers away from competitors
Disadvantages of vertical integration
Fewer economies of scale due to production at different stages of supply
Create problems of communication and co-ordination
Diseconomies of scale
What are Joint Ventures
When businesses join together to pursue a common project but remain separate in legal terms
Limits of business growth
Increased regulation
Financing growth
Increased competition
If in niche markers - limits to scalability
Define Organic Growth
When a business expands its own operations rather than relying on external takeovers and mergers
Why do many mergers and takeovers fail
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
