ch 6 Flashcards
How is Inorganic Growth defined?
a business growth strategy that involves two (or more) businesses joining together to form one much larger one
How is Organic Growth defined?
a business growth strategy that involves a business growing gradually using its own resources
What is the Distinction between Inorganic and Organic Growth?
-inorganic growth is much faster, organic growth is normally much slower, it takes time to develop and grow a business using its own resources
-organic growth is said to be a safer strategy as the owners expand their businesses by developing their current expertise. However, with inorganic growth the integration process causes problems such as culture clashes etc.
What are some Methods of growing organically?
New Customers
New Products
New Markets
New Business Model
Franchising
How can New Customers lead to Organic Growth?
the easiest approach for organic growth is to rely on driving sales from existing activities
it may be possible to find new customers by exploiting new distribution channels
How can New Products lead to Organic Growth?
Some businesses grow by developing new products
They may be very innovative and committed to research and development
Alternatively, a business might identify customers with slightly different needs
This could require adapting or modifying existing products to meet these needs. A business might need to invest some of its profits into product development
How can New Markets lead to Organic Growth?
this could be within the same country or outside
however overseas markets carry more risk because of the unfamiliarity of markets abroad.
Growing by selling in new areas is sometimes called geographic expansion
How can a New Business model lead to Organic Growth?
Developments in technology or social change may give rise to new business models
this approach could see the business grow very quickly because the size of the potential market opened up could be considerable - possible global
What are the advantages of Organic Growth?
-Organic growth is less risky than other growth strategies, will be well known and understood
-organic growth can also avoid the complication that might arise when integrating with another organisation
-Might be relatively cheaper than using other methods. Can use retained profits whereas business that grow inorganically often have to borrow money or raise fresh capital which adds to the cost of growth
-A business will gain more control when growing organically as there are no mergers or acquisitions taking place
-The financial position of a business might be better protected with organic growth as growth is gradual, there is less strain on financial resources cash flow is stronger and the business will retain more liquidity. Inorganic growth often requires huge outlays of money
–less likely to encounter diseconomies of scale.
What are the Disadvantages of Organic Growth?
-The pace of organic growth may be too slow for some stakeholders who may want the business to provide quicker returns on their investments
– if shareholders are unhappy they may sell there shares lead to share prices falling, possibly making the company vulnerable to a takeover
-Organic growth may prevent the business from ‘tapping into’ the resources owned by other businesses may miss out on profitable developments
-growing slowly may mean that a business gets left behind in the market small in comparison tho competitors who used inorganic growth and may lose its ability to compete effectively
-May take some time before a business can fully exploited economies of scale may mean that a business is having to operate with higher costs for longer periods of time – lower profit margins and make them less competitive
-if a market is growing rapidly, organic growth may not be appropriate businesses making the best progress in fast pace markets such as the phone market were growing through mergers or acquisitions.
Why would a business want to stay small?
-Personal Service(Many people prefer to do business with the owner of the company directly and are prepared to pay higher prices for the privilege
By staying small a business may be able to serve niche markets where it is usually easier for a business to deliver a personal service in such circumstances)
-Owner’s preference,Some will want to avoid the added responsibilities that growth brings
-Flexibility and Efficiency(they may be able to react more quickly to changes in market conditions or technology
Management can make decisions quickly, with out following lengthy procedures)
-Lowers Costs,In some cases, small firms might have lower costs than larger producers in the same markets
-Low Barriers to Entry
What is franchising?
A business model where a business owner allows another person to trade under their name.
Franchising enables rapid expansion through established brand recognition.
What does ‘retainedprofit’ refer to?
Profit after tax that is ‘ploughed back’ into the business.
This is often reinvested to fuel further growth.
Define ‘stake’ in a business context.
A financial interest in a business which entitles the investor to part-ownership.
Stakeholders may have varying degrees of influence based on their ownership percentage.
What is one method of growing organically?
Finding a new customer group by exploiting new distribution channels.
This involves reaching out to untapped markets to increase sales.
