Growth

Question 1

All types of growth

Answer 1

• Organic/ Internal
• Horizontal integration
• Vertical integration
• Forward integration
• Backward integration
• Conglomerate integration

Question 2

Type of growth-Organic/Internal

Answer 2

• A firm increasing in its size through investment in capital equipment or an increased labour force

Question 3

Type of growth-Horizontal Integration

Answer 3

• A joining together into one firm of two or more firms in the same industry at the same stage of production.

Question 4

Type of growth-Vertical integration

Answer 4

• A joining together into one firm of two or more firms at different production stages in the same industry

Question 5

Type of growth-Forward integration

Answer 5

• A joining together into one firm of two or more firms where the supplier mergers with one or more of its buyers

Question 6

Type of growth-Backward integration

Answer 6

• A joining together into one firm of two or more firms where the purchaser merges with one or more of its suppliers

Question 7

Type of growth-Conglomerate integration

Answer 7

• A joining together into one firm of two or more firms producing unrelated products.

Question 8

All the reasons for growth

Answer 8

• Economies of scale
• Increased market share
• Reduced risk
• Salaries and bonuses

Question 9

Reasons for growth-Economies of scale

Answer 9

• A larger company may be able to exploit economies of scale more fully. The merger of two medium sized car manufacturers is likely to result in potential in production, marketing and finance.

Question 10

Reasons for growth-Increased market share

Answer 10

• A larger company may be more able to control its markets. Therefore, can reduce competition in the marketplace to be better able to exploit the market.

Question 11

Reasons for growth-Reduced risk

Answer 11

• A larger company may be able to reduce risk. Many conglomerate companies have grown for this reason. Some markets are fragile (subject to large changes in demand when economies go into boom or recession)
  -E.g it was fashionable for tobacco companies to but anything which seemed to have a secure market like grocery stores.

Question 12

Reasons for growth-Salaries and bonuses

Answer 12

• Where there is a divorce of ownership, a larger company may justify higher salaries and bonuses to directors and managers. Since it is decisions about the size that will benefit them, but not necessarily bring any benefit to shareholders.

Question 13

Advantages of organic growth

Answer 13

• Advantageous for smaller firms
• Cheaper and time-saving
• Much easier than tarhetting another firm for expansion

Question 14

Disadvantages of organic growth

Answer 14

• Another firm has a market or an asset that it would be difficult or impossible to gain through organic growth
• May be too slow of growth for directors and managers who wish to maximise their salaries and bonuses from the business

Question 15

Advantages of vertical integration

Answer 15

• There may be cost savings. Integrating a supplier or buyer into the firm may make the firm more efficient.
• May also reduce risk as a supplier could have technology that may rival competitors
• Could give a firm more control over its market

Question 16

Disadvantages of vertical integration

Answer 16

• May have little expertise in that particular industry. E.g a motor manufacturing company purchases car dealerships may have little expertise to sell the cars
• Firms often pay too much for the firm they take over and the share price of the firm falls rather than rises
• Can be difficulties merging two or more firms together as the costs can be too high or they can just fail to merge together
• Many of the key workers in the firm that has been taken over may leave, taking with them much of the expertise that made it successful

Question 17

Advantages of horizontal integration

Answer 17

• May allow reductions in average costs due to economies of scale
• Can reduce competition in the market by taking out a competitor
• It can allow one firm to buy unique assets owned by another company like a new drug or operations in another part of the worldIt allows a business to grow in a market where it already has knowledge and expertise

Question 18

Disadvantges of horizontal itegration

Answer 18

• Firms often pay too much for the price of trhe company
• Integration of two firms is often managed poorly and many of the key workers may leave following the acquisition

Question 19

Advantages of conglomerate integration

Answer 19

• Reduces risk as the merging with another firm means that they do not soley rely on the ups and downs of their own market.
• May find it easier to expand compared to a situation where the companies are independent.
• Could be an opportunity for asset stripping as some firms specialise in buying other companies which they see as having more valuable individual assets than they buying price of the company.

Question 20

Disadvanatges of conglomerate integration

Answer 20

• Firms don’t have expertise in the market into which they Buy.
• Often pay too much for the firm they are buying
• Often poorly managed and many of the key workers may leave the following acquisition

Question 21

All the constraints on market

Answer 21

• Size of the market
• Access to finance
• Owner objectives
• Regulation

Question 22

Constraints on business growth- Size of the market

Answer 22

Many markets vary in size including very small markets that rely on the demand of the locals but if they expanded they wouldn’t be able to survive.
-Equally, national and international markets can be small too like the market for cricket balls may not be as big as the market for coffee.*

Question 23

Constraints on business growth-Access to finance

Answer 23

• To expand its vital that there is an easy access to finance as business don’t only use profits to expand but sometimes use loans too. This depends on the bank being willing to give them a loan.

Question 24

Constraints on business growth-Owner objectives

Answer 24

• This is due to how not ever owner wants to grow the firm as they may be content with the profit they make now and don’t want the extra risk of expanding the company.

Question 25

Constraints on business growth-Regulation

Answer 25

• Can be an important factor in a few examples. E,g an existing pharmacy, looking to expand can only do this by buying another pharmacy.

-For large companies, competition law can restrict the scope of takeovers and mergers.

Question 26

Reasons for demergers

Answer 26

• Lack of synergies
• Price
• Focussed companies

Question 27

Reasons for demergers-Lack of synergies

Answer 27

• Management may feel that there are no synergies between parts of the firm. This means that one part of the firm is having no impact on the more efficient and profitable running of the other part of the firm.
  -This could even mean there is a diseconomies of scale due to how senior management are having to divide their time between two or more businesses which have little to do with each other

Question 28

Reasons for demergers-Price

Answer 28

• The price of demergers might be higher than the price of a single larger firm. E.g a firm may be valued 300 million but if split in two it could be worth 150 million and 250 million.
  -The relatively poor performace of one part of the company can drag down the share price of the whole company despite the fact that other parts are performing well.

Question 29

Reasons for demergers-Focussed companies

Answer 29

In the 1970’s it was fashionable for conglomerates to diversify risk. However now its more common for firms to create firms which are highly focussed on one or just a few key markets.

-The management can deliver higher proits and growth by concentrating their energies on getting to know and exploiting a limited range of markets.

Question 30

Whos impacted by demeregrs

Answer 30

• Businesses
• Workers
• Consumers

Question 31

Impacts of demeregers-Businesses

Answer 31

• Firms will benefit from a demerger if the increased specialisation that results leads to greater efficiency. Firms will loose out if the demerger leads to more inefficiency.

-If the demerged firms run less well than when they were a single firm, then profits are likely to fall

Question 32

Impacts of demergers-Workers

Answer 32

• May benefit or lose out following a demerger. Senior managers may gain promotion. E.g one firm only needs one senior financial director. If it splits into two, each firm will need their own senior financial director.

-But some workers may loose their jobs following a demerger as if the firms run more efficiently individually this is likely to result in job losses.

Question 33

Impacts of demergers-Consumers

Answer 33

• They will gain if the demerged firms become more efficient, cut costs and offer lower prices. They could also gain if the demerged firms invest more and create more inivative products.
  -They may loose out if the firm focuses on increasing profits in their business through raising prices or reducing their product ranges.

Question 34

Using pharmaceutical companies as an example, explain what it means for a firm to grow internally.

Answer 34

A pharmaceutical company could grow internally by increasing the quantity of pharmacists they hire to increase the supply of a service.

Additionally, they could increase the amount of investment they put into research into different drugs or how to produce more effective drugs.

Question 35

Two possible reasons why Celgene has chosen to grow through a process of horizontal integration rather than to grow internally.

Answer 35

-One reason for this is that other competitors can just replicate their methods of production as they faced a patent cliff in 2019 so the company just chooses to settle agreements with other companies

-Another reason is that they desire to maximise and increase the quality of output through smaller sized firms.

Question 36

Discuss whether it would be better for pharmaceutical companies such as Celgene, to become conglomerates, rather than remaining narrowly focussed on selling pharmaceuticals products.

Answer 36

-It could be a great opportunity for Celgene to be a conglomerate due to the fact that they could diversify the risk onto a wider share of the market. This means that they won’t only be relying on the success of the pharmaceutical market.

-However, they may need to be very careful as conglomerates are often poorly managed and can lead to the downfall of companies which in the case of a pharmaceutical company could be catastrophic as many people may rely on Celgene for prescriptions