Business Growth and Demergers Flashcards
what are the 5 different types of business growth
organic
horizontal integration
forward vertical integration
backward vertical integration
conglomerate integration
what is organic growth
growth through reinvesting retained profits, borrowing and/or selling shares
what type of growth is it through reinvesting retained profits, borrowing and/or selling shares
organic growth
what are the advantages and disadvantages of organic growth
-low levels of risk as it is gradual and remains in a familiar industry
-growth can be slow
what is horizontal integration
merging with a firm in the same industry and stage of production
what type of growth is it through merging with a firm in the same industry and stage of production
horizontal integration
what are the advantages and disadvantages of horizontal integration
-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
what is forward vertical integration
merging with a firm in the same industry and a later stage in the production process
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
forward vertical integration
what are the advantages and disadvantages of forward vertical integration
-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
what is backward vertical integration
merging with a firm in the same industry and at an earlier stage of production
what type of growth is it when a firm merges with a firm in the same industry and at an earlier stage of production
backward vertical integration
what are the advantages and disadvantages of backward vertical integration
-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
what is conglomerate integration
merging with a firm in a completely different industry
what kind of growth is it when a firm merges with a firm in a completely different industry
conglomerate integration
what are the advantages and disadvantages of conglomerate integration
-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
factors that can constrain business growth
-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)
what is a demerger
when a firm either sells off its subsidiaries (parts of the business) or divides itself into two or more firms
why might firms demerge
-raise finance
-improve managerial control
-reduce or avoid diseconomies of scale
-increase profitability
-forced to by the competition authorities
what are the impacts of demergers on
-consumers
-firms
-workers
-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
