Business Growth Flashcards
Define Internal Growth.
Internal Growth refers to increasing the production scale:
- A firm can increase any one of its factors of production to grow.
- (ADVANTAGE) A firm has total control over growth quantity.
- (DISADVANTAGE) The process can be slow and expensive.
Define External Growth.
External Growth refers to MERGERS or TAKEOVERS:
- (ADVANTAGE) External growth is often quicker and cheaper than internal growth.
- (ADVANTAGE) An easy way to gain experience and expertise in a new market.
Define Horizontal Integration.
- Horizontal integration refers to combining firms at the SAME production stage for similar products.
- (ADVANTAGE) Firms can increase economies of scale, reduce competition & increase market share.
Define Vertical Integration.
Vertical Integration combines firms at DIFFERENT stages in production for the SAME product:
- Forward Integration occurs if a firm takes over a firm further along the production line.
- Backward Integration occurs if a firm takes over a firm further back in the production line.
- (ADVANTAGE) A firm can gain more control over the production process and gain efficiency.
- This can lead to barriers to entry, as competitors lose access to suppliers.
Define Conglomerate Integration.
Conglomerate Integration refers to firms merging from DIFFERENT MARKETS:
- (ADVANTAGE) Conglomerate mergers allow firms to diversify and spread risk of market shocks.
- (ADVANTAGE) A conglomerate can use profit for investment.
What are the disadvantages of External growth?
- Mergers could lead to duplication of staff.
- Merged firms may have different, incompatible objectives.
- A firm can incur a lot of debt from financing the merger.
- Larger firms can suffer from diseconomies of scale.
- A firm could overestimate the value of its victim firm, and pay more than it’s worth.
What effects would a merge have on consumers?
- (ADVANTAGE) A larger firm may benefit from economies of scale, which would lead to price reductions for consumers.
- (ADVANTAGE) Combine innovation from the merged firm could lead to better quality products.
- (DISADVANTAGE) Consumers would lose product choice.
- (DISADVANTAGE) Loss of competition could lead to higher prices.
- (DISADVANTAGE) Merged firms may produce less, leading to loss of market supply.
Define a Demerger.
A Demerger is the separation of a firm in to multiple individual firms:
- A firm may demerge due to diseconomies of scale with the aim that the smaller firms could narrow their market and make a profit.
Why do Firms Grow?
Firms grow to increase PROFIT, by:
- Increasing economies of scale, until a firm reaches minimum efficient scale of production (MES)
- Increasing market share and reducing competition. at a monopoly share, a firm makes abnormal profits.
- Expansion into new markets, e.g a firm could add a location or diversify.
Why would a firm demerge?
- A firm may sell off weak parts of it’s business for a low price, to improve the remaining business.
- To release money to pay off loans and debts.
- To release money for investment in other sectors.
- The merger objectives did not materialise.
- To abide Government intervention, which may seller are monopoly powers.
- To increase overall value, if the deprecation makes one or both companies worth more.
What impact would a demerger have on businesses?
- (ADVANTAGE) A demerged firm may become more efficient by refining it’s production process.
- (DISADVANTAGE) Reduction in economies of scale.
- (ADVANTAGE) Reduction in diseconomies of scale.
- (ADVANTAGE) A firm will have greater independence.
- (ADVANTAGE) A firms value is likely to increase comparison to it’s merged comparisons.
- a selling off parts of the company gives a negative image to the shareholders.
What Impact would a demerger have on Workers?
- (ADVANTAGE) There may be an improvement in manager/worker relations as a smaller, demerged firm will have fewer employees.
- (ADVANTAGE More jobs can be created, as staff must support two instead of one firm.
- (DISADVANTAGE) Workers may lose morale l if the situation isn’t explained fully.
What impact would a demerged have on consumers?
- Competition may increase, leading to increased consumer choice & price reductions.
- Consumers will be less confused about what each company does.
- Consumers are likely to benefit from smaller firms that are more focused on their needs.
Why would a firm choose to stay small?
- To minimise bureacracy, red tape and legal requirements.
- To minimise diseconomies of scale, such as an impersonal connection to consumers, becoming complacent and inefficient; and not being adaptive.
- Firm owners may not want a large amount of work.
- Firms may want to remain small to avoid being noticed by larger firms.
Why would a firm be forced to stay small?
- If they can’t raise the necessary finance.
- If the firm has a niche market, there may not be a large enough consumer base to expand into.
- A firm may lack the entrepreneurial skills.
- A firm may lack the resources to deal with the additional regulations.
