Growth Flashcards
1
Q
All types of growth
O,H,V,F,B,C
A
- Organic/ Internal
- Horizontal integration
- Vertical integration
- Forward integration
- Backward integration
- Conglomerate integration
2
Q
Type of growth-Organic/Internal
A
- A firm increasing in its size through investment in capital equipment or an increased labour force
3
Q
Type of growth-Horizontal Integration
A
- A joining together into one firm of two or more firms in the same industry at the same stage of production.
4
Q
Type of growth-Vertical integration
A
- A joining together into one firm of two or more firms at different production stages in the same industry
5
Q
Type of growth-Forward integration
A
- A joining together into one firm of two or more firms where the supplier mergers with one or more of its buyers
6
Q
Type of growth-Backward integration
A
- A joining together into one firm of two or more firms where the purchaser merges with one or more of its suppliers
7
Q
Type of growth-Conglomerate integration
A
- A joining together into one firm of two or more firms producing unrelated products.
8
Q
All the reasons for growth
A
- Economies of scale
- Increased market share
- Reduced risk
- Salaries and bonuses
9
Q
Reasons for growth-Economies of scale
A
- 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.
10
Q
Reasons for growth-Increased market share
A
- 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.
11
Q
Reasons for growth-Reduced risk
A
- 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.
12
Q
Reasons for growth-Salaries and bonuses
A
- 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.
13
Q
Advantages of organic growth
A
- Advantageous for smaller firms
- Cheaper and time-saving
- Much easier than tarhetting another firm for expansion
14
Q
Disadvantages of organic growth
A
- 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
15
Q
Advantages of vertical integration
A
- 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
16
Q
Disadvantages of vertical integration
A
- 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
17
Q
Advantages of horizontal integration
A
- 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
18
Q
Disadvantges of horizontal itegration
A
- 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
19
Q
Advantages of conglomerate integration
A
- 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.
20
Q
Disadvanatges of conglomerate integration
A
- 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
21
Q
All the constraints on market
A
- Size of the market
- Access to finance
- Owner objectives
- Regulation
22
Q
Constraints on business growth- Size of the market
A
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.*
23
Q
Constraints on business growth-Access to finance
A
- 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.
24
Q
Constraints on business growth-Owner objectives
A
- 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.
25
Constraints on business growth-Regulation
* 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.
26
Reasons for demergers
* Lack of synergies
* Price
* Focussed companies
27
Reasons for demergers-Lack of synergies
* 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
28
Reasons for demergers-Price
* 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.
29
Reasons for demergers-Focussed companies
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.
30
Whos impacted by demeregrs
* Businesses
* Workers
* Consumers
31
Impacts of demeregers-Businesses
* 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
32
Impacts of demergers-Workers
* 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.
33
Impacts of demergers-Consumers
* 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.
34
Using pharmaceutical companies as an example, explain what it means for a firm to grow internally.
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.
35
Two possible reasons why Celgene has chosen to grow through a process of horizontal integration rather than to grow internally.
-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.
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.
-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
