growth and internal business structures Flashcards
why would a business pursue an objective of growth
so they can dominate the market and control the price
exploite economies of scale eg through bulk buying
so they can avoid a takeover
so they can spread its risk through diversification (presence in many markets)
what are the two ways a business can grow
internal growth (organic growth)
external growth
what is organic growth
this is when a business reinvests profits or raise finance to invest internally
how can organic growth be achieved`
open more retail premises or build more facilities. This would allow your business to widen and increase your production capabilities
employ more staff which again would allow you to increase your production capacity or deal with more customers
increase your product portfolio in order to appeal to new markets and spread your risk
in what ways can external growth be achieved
takeover - one company buys out ownership and control of another
merger - where two companies come together to make one company. Control and ownership is shared. this does not have to be shared though.
what is intergration
this is when two companies come together after a takeover or a merger
what are the types of intergration
horizontal
vertical
conglomerate/diversification
what is horizontal intergration
this is when two firms on the same stage of production join together
what are the advantages of horizontal intergration
common knowledge of market in which they operate so there is a reduced risk of failure that would have existed from entering a new market
it reduces the number of competitors which gives potential market dominance and control over price and supply
quick and easy to expand and increase market share
achieve economies of scale through buying discounts which lowers average costs
avoids duplication of resources and is better for the environment
similar skills of companies ie COMBINATION OF EXPERTISE can specialise in its core area
what are the disadvantages of horizontal intergration
firm is not spreading its risk so the market suffers the whole business is at risk
company becomes too large and bloated. It will then become very hard to manage, become inefficent and operate properly
what is vertical intergration
this is when a firm acquires another firm on a different stage of production.
what are the advantages of backwards vertical intergration
eg a firm joining with their supplier
can control supply of components and raw materials
standardise paperwork and procedure.
extend scope of firms activities which spreads its risk
what are the advantages of forwards vertical intergration
it allows them to secure profit margin of customers
can control image and distribution outlets of products
eases planning as firm know its guaranteed outlets to sell its products
what are the disadvantages of vertical intergration
may be difficult to achieve economies of scale as firm is moving into a different area of business - no bulk buying opportunities
more of a risk as firm may lack skills to thrive in new area of business
what is conglomerate growth
combination of 2 or more corporations engaged in entirely different businesses that fall under one corporate group
