Business Growth (3.1.2) Flashcards
What are the two types of Growth for a business?
Organic (Internal)
or
Inorganic (External)
What is Organic Growth (Internal)?
Where the firm grows by increasing their output, for example increased investment or more labour. They may open new stores, increase their range of products etc..
What are the advantages of Organic Growth?
-The firm is able to keep control over their business
-Pace of growth is manageable
-Less risky
-Avoids diseconomies
-Management know and understand bbusiness
What are the disadvantages of Organic Growth?
-Sometimes another firm has a market or an asset which the company would be unable to gain through inorganic growth
-Can be too slow for directors who wish to maximise their salaries
-More difficult for firms to get new ideas
What is Inorganic (External) Growth?
Growth that occurs as a result of merger or takeovers
What is a merger/amalgamation?
Two or more firms join under common ownership
What is Integration?
Growth through amalgamation, merger or takeover
What are the three different types of Integration?
- Forwards/Backwards Vertical Integration
2.Horizontal Integration - Conglomerate Integration
What is Vertical Integration?
Integration of firms in the same industry but at different stages in the production process.
What are the two ways in which Vertical Integration can go?
Backwards or Forwards
What is Backwards Vertical Integration?
If the merger takes the firm back towards the supplier of a good
What is Forwards Vertical Integration?
When the firm is moving towards the eventual consumer of a good
What are the advantages of Vertical Integration?
-Increased potential for profit as firms takes potential profit from a larger part of chain of production
-Less risks as supplier don’t have to worry about buyers not buying their goods and buyers don’t have to worry about suppliers not supplying their goods
-With Backwards Integration, business can control quality of supplies and ensure delivery is reliable. Don’t have to worry about being charged high prices for supplies, keeping costs low and allowing lower prices for consumers. Increase competitiveness and sales
-Forward Integration secures retail outlets and can restrict for competitors
What are the disadvantages of Vertical Integration?
-Firms may have no expertise in industry they took over
e.g. car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa
What is Horizontal Integration?
Where firms in the same industry at the same stage of production integrate
What are the advantages of Horizontal Integration?
-Helps to reduce competition as competitor is taken out and increases market share, giving firms more power to influence markets
-Firms will be able to specialize and rationalize and so can reduce areas of business which are duplicated
-Business is able to grow in a market where already has expertise which can make merger successful
What are the disadvantages of Horizontal Integration?
-Increase the risk for the business as if particular market fails have nothing to fall back on and will have invested a lot of money into that area. “Placing their eggs in one basket”
What is Conglomerate Integration?
Where firms in different industries with no obvious connections integrate. Can sometimes be linked by common raw materials/technology/outlets.
What are the advantages of Conglomerate Integration?
-Useful for firms when there may be no room for growth in the present market
-Range of products reduces risk for firms if whole industry fails they will still survive
-Easier for each individual part of business to expand
What are the disadvantages of Conglomerate Integration?
-Firms going into markets in which they have no expertise which can often be damaging for the business
What are the Constraints of Business Growth?
- Size of Market
- Access to finance
- Owner Objectives
4.Regulation
How is Size of the Market a Constraint of Business Growth?
Market is limited to a certain size and so not all businesses able to mass produce their goods wouldn’t be bought by consumers. There is always limits on growth. In particular niche markets and markets for luxury items make it difficult for businesses to grow
How is Access to finance a Constraint of Business Growth?
Firms use two main ways to finance growth (Retained Profit and Loans). If firms don’t make enough profit they will not able to use retained profits to grow. Banks may be unwilling to lend firms money, particularly small businesses they see as high risk. Firms will be unable to grow as they can’t finance it.
How is Owner Objectives a Constraint of Business Growth?
Some owners may not want their business to frow any further as they are happy with current profits and don’t want extra risk or work that comes with growth
How is Regulation a Constraint of Business Growth?
In some markets, the government may introduce regulation which prevents businesses from growing
