Business Growth and Demergers

Question 1

what are the 5 different types of business growth

Answer 1

organic
horizontal integration
forward vertical integration
backward vertical integration
conglomerate integration

Question 2

what is organic growth

Answer 2

growth through reinvesting retained profits, borrowing and/or selling shares

Question 3

what type of growth is it through reinvesting retained profits, borrowing and/or selling shares

Answer 3

organic growth

Question 4

what are the advantages and disadvantages of organic growth

Answer 4

-low levels of risk as it is gradual and remains in a familiar industry

-growth can be slow

Question 5

what is horizontal integration

Answer 5

merging with a firm in the same industry and stage of production

Question 6

what type of growth is it through merging with a firm in the same industry and stage of production

Answer 6

horizontal integration

Question 7

what are the advantages and disadvantages of horizontal integration

Answer 7

-increased market share leads to economies of scale
-greater market power to set prices

-diseconomies of scale due to issues like culture clashes between the merged firms

Question 8

what is forward vertical integration

Answer 8

merging with a firm in the same industry and a later stage in the production process

Question 9

what type of growth is it when a firm merges with a firm in the same industry and a later stage in the production process

Answer 9

forward vertical integration

Question 10

what are the advantages and disadvantages of forward vertical integration

Answer 10

-control of outlets - easier to co-ordinate production and distribution so increased efficiency
-cut out middleman e.g transport to lower costs

-diseconomies of scale e.g coordination if firm becomes too big
-firm may not have any expertise in the next stage of production process leading to inefficiencies

Question 11

what is backward vertical integration

Answer 11

merging with a firm in the same industry and at an earlier stage of production

Question 12

what type of growth is it when a firm merges with a firm in the same industry and at an earlier stage of production

Answer 12

backward vertical integration

Question 13

what are the advantages and disadvantages of backward vertical integration

Answer 13

-gain control of inputs and therefore guarantees supply
-cuts out middleman thus lowering costs

-diseconomies of scale e.g coordination as business is bigger and more difficult to manage
-firm may not have any expertise in the previous stage of production process leading to inefficiencies

Question 14

what is conglomerate integration

Answer 14

merging with a firm in a completely different industry

Question 15

what kind of growth is it when a firm merges with a firm in a completely different industry

Answer 15

conglomerate integration

Question 16

what are the advantages and disadvantages of conglomerate integration

Answer 16

-diversification - lowers the risk incase demand falls in one part of their business

-high risk - firm may not have the expertise to go into a new market leading to inefficiencies
-if a venture fails it could damage the overall brand of the firm

Question 17

factors that can constrain business growth

Answer 17

-size of the market (if a market is too small there would be no demand for the product leading to inefficiencies)
-access to finance
-owner objectives (e.g the firms objective may to be profit satisficing hence dont want to grow)
-regulation (competition authorities can stop mergers and force firms to demerge)

Question 18

what is a demerger

Answer 18

when a firm either sells off its subsidiaries (parts of the business) or divides itself into two or more firms

Question 19

why might firms demerge

Answer 19

-raise finance
-improve managerial control
-reduce or avoid diseconomies of scale
-increase profitability
-forced to by the competition authorities

Question 20

what are the impacts of demergers on
-consumers
-firms
-workers

Answer 20

-consumers - greater competition should lead to lower prices, more choice, better quality and therefore increased consumer satisfaction

-firms - short term a reduction in revenue and profits but in the long run increased efficiency and therefore profits

-workers - demerged firms are likely to have less hierarchical organisational structure meaning that there could be job losses and demotivation during the demerger