Business growth Flashcards
What is organic growth?
Growth from within, when firms grow by expanding their production through increasing output, widening their customer base.
What are some examples of organic growth?
-Investment into research and development, technology and training.
-Developing a new product or by diversifying their
range (innovation)
What are some advantages of organic growth?
-Less risky than inorganic growth
-Firms grow by building upon their strengths and using their own funds, such as retained profits, to fund the growth, meaning that the firm does not building up debt,
and growth is more sustainable.
-Existing shareholders retain their control over the firm, which may reduce conflicts in objectives that are possible when there is a takeover.
What are some disadvantages of organic growth?
- Its a long term strategy, and is much slower than growing inorganically; this could mean competitors gain more market power by expanding in the meantime. It could also make shareholders unhappy if they want faster growth.
- Firms might rely on the strength of the market to grow, which could limit how much and how fast they can grow
What are the four types of merger?
- Forward vertical integration
- Backward vertical integration
- Horizontal integration
- Conglomerate integration
What is Forward vertical integration?
Forward vertical integration occurs when the firm integrates with another firm closer to the consumer. This involves taking over a distributor.
What is Backward vertical integration?
Backward vertical integration occurs when a firm integrates with a firm closer to the producer. This involves gaining control of suppliers.
What is Horizontal integration?
The merger of two firms in the same industry and the same stage of production.
What is Conglomerate integration?
This is the combining of two firms with no common connection.
What are the advantages of Horizontal integration?
- Firms can increase output quickly, so they can take advantage of economies of scale.
- The two firms will have expertise in the same industry, so the merged firm can gain advantages, such as in marketing.
What are the disadvantages of Horizontal integration?
- Firms can grow quickly, which can give them a competitive edge over other firms in the market; however, this could lead to monopoly power and there is the potential of lower inefficiency as a result.
- There could be disagreements in the objectives of the two firms which merged.
What are the advantages of Conglomerate integration?
- It can help both firms become stronger in the market, than if they were individual.
- The conglomerate can reach out to a wider customer base, and market competition could be reduced.
What are the disadvantages of Conglomerate integration?
-There is a risk of spreading the product range too thinly, and there might not be sufficient focus on each range. This might reduce quality and increase production costs.
What is a takeover?
When one business buys out another business on the stock exchange.
