Growth Flashcards
Why do businesses grow?
To increase profits To avoid being a takeover target To remove a competitor To reduce risk of business failure To become market leader To be able to take advantage of economies of sale
What is internal growth?
Open new branches
Develop new products
Hire additional staff
Advertise to increase sales
Advantages of internal growth?
No loss of control to outsiders Less risky Hiring new staff will bring in new ideas Financed through internal sources Increase production capacity by investing in new capital
Disadvantages of interval growth?
Slower method of growth
Limited by size of existing market
Advantages of external growth?
Larger and more financially secure
Increased number of customers
Bigger presence in the market
Disadvantages of external growth?
Risk main business may be harmed
Takes time to merge the two different systems
Large financial investment required
What are the methods of external growth?
Horizontal integrwtion Forward vertical integration Backward vertical integration Conglomerate diversification Divestment Demerger Deintegretion Asset stripping Management buy-in Management buy-out
Horizontal integration
Firms producing the same product
- eliminates competition
- increase sales and dominate market
- acquire assets of the other business
- gain economies of sale
Backward vertical integration
Taking over a supplier
- control the source of its goods
- cheaper stock from supplier
- ensures quality of inputs
Forward vertical integration
Business takes over a customer
- can control pricing of their products
- guaranteed outlet for their products
Conglomerate diversification
Different from their core activity
- larger and more financially secure
- spreads risk by having variety of products
- overcomes seasonal fluctuation
Divestment
Firm sells assets or subsidiaries
- focus on core activities
- obtain funds
- removes underperformance
- business may sell for more in ‘chunks’
Demerger
Splitting to their own companies
- focus on core activities
- allows growth in the most profitable area
Deintegretion
Sells a business previously taken over
- focus on areas with greatest brand value
- allows growth in most profitable area
- raise finance from sale
Asset stripping
Buys outside firm where value of shares is lower than value of assets and sells off its assets
- sum of parts will be greater whensold off separately
- increases the wealth of buyers
Management buy-in
Outside management buys the business
Happens to firms struggling to succeed in the market
Management buy out
Existing management within the business take control
Management team believe owners vision won’t lead to success
Have to raise funds for this
Outsourcing advantages
Reducing cost of employing staff for non core activities
Focus on core activities
Outside company may produce goods at a lower cost and better quality
Saves cost on specialist equipment
Outsourcing disadvantages
Confidentiality issues
May be very expensive
Reduced control
Firm may take a long time to complete job
May involve redundancies
Communication problems may mean job is not up to standard
Competition and markets authority
Block mergers or takeovers that seem anticompetitive
Can’t work with other firms to fix prices
Can’t pay unfairly low prices to suppliers
Could be fined for anticompetitive behaviour
