Business Growth

Question 1

Reasons for Business Growth

5

Answer 1

Benefit from Economies of Scale

Average costs can decrease due to economies of scale

Risk can be spread across various departments and therefore reduced. e.g. if one venture fails it has less of a negative impact on the firm as they have other ventures which are generating profit

Can benefit from Managerial Economies of Scale (Larger companies can afford to hire specialists to oversee departments within the firm. This will increase efficiency and quality)

Market Power increases can allow for the benefit of being a monopoly, make market less contestible

Question 2

Growth Strategies

3

Answer 2

Organic - Growth from within the business e.g. new products

External - Growth from takeovers & mergers

Diversification - Expanding into new markets with new products. Very risky

Question 3

Backward Vertical Integration

Answer 3

Acquiring a business operaterating earlier in the supply chain e.g. retailer buys a wholesaler

Question 4

Conglomerate Integration

Answer 4

A merger between firms that are involved in unrelated business activities

Question 5

Forward vertical integration

Answer 5

Acquiring a business further up in the supply chain e.g. a vehicle manufacturer buys a car parts distributor

Question 6

Horizontal integration

Answer 6

When companies from the same industry amalgamate (combine)

Question 7

Organic Growth

Answer 7

Business gets larger by increasing the scale of its operations, maybe through reinvesting profits or external investment

Question 8

Vertical Integration Advantages

5

Answer 8

• Forward vertical integration gives more control over the market. A brewery that buys up pubs has more access access to beer drinkers and it can stop its pubs selling rival beers
• Improved access to raw materials, possibly at the expense of rival firms e.g. Ikea buying Baltic Forests
• Backward vertical integration gives firms more security over their supply e.g. not relying on other firms for supply
• Vertical integration may reduce costs through business rationalisation. Could be possible to close some offices and have a single headquarters for both firms, or share some management functions e.g. finance
• Can undercut the competition as removing the ‘middle-man’. Can then either lower prices to increase demand or raise profit margin

Question 9

Vertical Integration Disadvantages

3

Answer 9

• Firms buying suppliers or customers (backwards and forward integration) may not have sufficient knowledge of the market, leading to lower efficiency, higher costs and a poorer product.
• Merged companies have different cultures and procedures, this can lead to conflict and inefficiency
• Mergers often result in redundancies, meaning experienced workers may take their talents to other companies and moral can fall

Question 10

Advantages of Horizontal Integration

5

Answer 10

• Exploit internal economies of scale (average cost of production decreases as firms getting larger)
• Cost savings from the rationalisation of the business (redundancies)
• Potential to secure revenue synergies (I.e. sharing distribution channels)
• Reduces competition by removing key rivals - this increases market share and long-term pricing power
• Buying an existing and well-known brand can be cheaper than organically growing a brand - can make barriers to entry much stronger for potential rivals

Question 11

Examples of Vertical Integration

2 each

Answer 11

Backwards - Peugot carplant in Birmingham bought their supplier & moved them next door. This increased flexibility and efficieny in the supply chain.
Ikea buying Baltic Forests to control their raw materials
Sainsburys buying birdseye

Forwards - Breweries owning pubs. Google buying motorola

Question 12

Why do many mergers fail?

4

Answer 12

• Huge financial costs, often rely on loans which leave large overhanging debt
• Share prices can fall
• Many mergers fail to enhance shareholder value
  because of clashes of corporate cultures, priorities and key personalities
• Loss of human capital (skilled workers)

Question 13

Key Constraints on Business Growth

4

Answer 13

Regulation - Growing businesses with increasing market share may come to the attention of the CMA (Competition & Markets Authority) e.g. Amazon & Google

Competition - In contestable markets there is always the threat of entry from rival firms: technological change in reducing entry barriers

Finance - Many small-medium sized firms run up against finance constraints including access to loans

Size of the market - Businesses achieving success in niche markets may find limits to scalability

Question 14

Minimum Efficient Scale def.

Answer 14

The minimum output where firms can benefit from economies of scale