growth Flashcards
What are examples of internal growth?
Launch new products
introduce e- commerce
advertising
hire more staff
open new branches/expand existing branches
what is diversification?
This is when products are launched across different markets, eg Samsung sell mobile phones, tablets and TVs but also refrigerators and washing machines. This increases potential customers and spreads risk across different markets. However, it does require numerous resources to offer such a vast product range and the business may need to use product grouping
What is horizontal integration?
This occurs when two businesses from the same sector of industry become one business. This could mean two dairy farms merging (primary sector) or one bank taking over another bank (tertiary sector). The new, larger business can then dominate the market as competition will be vastly reduced. They can also use economies of scale to reduce prices by buying in bulk however they may in fact decide to raise prices as there is less competition, which will be bad for customers.
What are the advantages of horizontal integration?
Competition is reduced and they can dominate
the market
Can benefit from economies of scale
Can raise prices due to reduced competition
What are the disadvantages of horizontal integration?
Quality may suffer due to lack of competition
May breach EU competition rules
Customers may have to pay higher prices
What is vertical integration?
Vertical integration occurs when two businesses from different sectors of industry become one business and can either be forwards vertical or backwards vertical integration. When vertically integrated businesses separate, it is known as deintegration
What is forward integration?
Forwards vertical integration is when a business takes over or merges with a business in a later sector of industry
What is backwards integration?
Backwards vertical integration is when a business takes over or merges with a business in an earlier sector of industry, in other words they take over their supplier.
What are the disadvantages of backwards and forward integration
It can be difficult to manage the new activities which can result in higher costs
· focus on a new part of the business can negatively affect core activities
· monopolising markets may have legal repercussions
What is lateral integration?
This is when a business acquires or merges with a business that is in the same industry but does not provide the exact same product. The businesses sell related goods or services but they do not compete directly with each other
What are the advantages of lateral integration?
The business can target new markets and
therefore increase sales.
New products can complement existing ones
What are the disadvantages of lateral integration?
The lack of knowledge in slightly different market may affect the performance of the products.
It may adversely affect core activities.
What is conglomerate integration?
Conglomerate integration occurs when businesses in different markets join together. In other words their business activities are totally unrelated. They do this primarily to spread the risk of failure. They will also, of course, increase their chances of maximising profits by having more and varied products and services for sale.
What are the advantages of conglomerate integration?
The company can spread risk. If one market fails the losses can be compensated for by profits in another.
Overcome seasonal fluctuations in their markets and provide year round sales for the organisation
It makes the firm larger and more financially secure
The firm acquires the assets of other companies
What are the disadvantages of conglomerate integration?
May take on a business in a market they know nothing about and cause it to fail
Having too many products across different markets can cause the company to lose focus on core activities, impacting other products
The business may become too large and inefficient to manage
What are the advantages of a takeover?
The buying business gains market share and resources of the smaller business
Can spread risk of failure
Economies of scale can be achieved
Competition is reduced which will increase sales
What are the disadvantages of a takeover?
Can lead to job losses in the taken-over business as the buying business wants its own management and employees
Can have a bad effect on the local economy if the buying business moves the headquarters or production to its home country
Can be bad for customers as less competition will mean higher prices
A change of name can put off loyal customers of the taken-over business
Can be expensive to acquire another business
What are the advantages of a merger?
Market share and resources shared, which can spread risk of failure and increase profits
Economies of scale can be achieved
Each business can bring different areas of expertise to the merger
Unlike a takeover jobs are more likely to be spared in both businesses
Can overcome barriers to entering a market, such as strong competition
What are the disadvantages of a merger?
Customers can be put off by the merger, especially if a new logo etc… is created
Marketing campaigns to inform customers of changes can be expensive
Can be bad for customers as less competition will mean higher prices
What is retained profits?
Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend. Retained profit is widely regarded as the most important long-term source of finance for a business.
What is outsourcing?
This is also known as contracting-out is when an organisation arranges for another organisation to carry out certain activities instead of doing it themselves. A business could outsource their administration or IT work, printing, legal services, marketing and accountancy. Perhaps a hotel would outsource its laundry services or your school may outsource its catering to a specialist catering company. A business will generally do this to concentrate on core activities, in other words do what they are good at rather than getting bogged down with additional services.
What is advantages of outsourcing?
Allows business to concentrate on core activities
Less labour and equipment required for outsourced activities, e.g. saving on printers and reprographics staff
High quality work from outsourced business as it should have greater expertise and specialist equipment
Outsourced business may provide the service cheaper than in house as they can benefit from economies of scale
Only use service when required so saving costs on idle staff/machinery
What is the disadvantages of outsourcing?
Less control over outsourced work so quality may drop
Communication between businesses needs to be very clear to make sure exact specifications are met
May have to share sensitive information that could get into the hands of competition
Outsourcing could be more expensive that in-house as specialists and expertise comes at a price
Whats a demerger?
A de-merger exists when an organisation splits into two separate organisations. This can often be a previously integrated organisation that decide to go their own separate ways again as they realise they would be better on their own, specialising in their own markets.
What is the advantages of a demerger?
Each new ‘half’ can concentrate on core activities
Each new business has the best chance to operate efficiently and grow in the future
Can meet competition regulations, set by the EU
What is the disadvantages of a demerger?
Customers may be put off by the de-merger and leave altogether
Financial cost of re-branding shop fronts, marketing campaigns to inform customers etc..
