Growth strategies compared

Question 1

An electronics factory is aiming to grow over the next few years. As Head of Operations you have been asked to advise the board on whether growing organically or growing through horizontal integration sould be the preferred strategy. Prepare a summary of advantages and disadvantages of both strategies.

Answer 1

Organic Growth
Advantages

• No loss of control
• New staff can bring new ideas and experience
• Introducing new products can reach different markets
• Less risky than a takeover
  Disadvantages
• Can be a slow method of growth
• May be limited by the size of the market
• Finance to grow organically may be limited

Horizontal Integration

Advantages

• Reduces competition if the acquired business is a rival in the market.
• Can result in economies of scale, which reduces unit costs.
• Increases market share which means the - business can charge higher prices.
  Other businesses can bring new skills and specialist departments to the business.
• Larger businesses often find it easier to raise funds.

Disadvantages

• Diseconomies of scale may occur if the business becomes too large, which leads to higher unit costs.
• Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration.
• May need to make some workers redundant, especially at management levels – this may have an adverse effect on motivation.

Question 2

Vertical integration and diversification are different strategies for growing a business. Contrast the advantages and disadvantages of each approach

Answer 2

Vertical Integration
Advantages

-Guarantees a market to sell a product (FVI)
- Guarantees the quality of inputs and supply of stock (BVI)
- Cuts out the middle man leading to higher profits
- More control over pricing
- Limits the supply to competitors

Disadvantages

• Integration can take time and resources away from core activities.
• Diseconomies of scale may occur if the business becomes too large, which leads to higher unit costs.
• Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration.
• May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.

Diversification
Advantages

• Spreads risk across different markets
• New markets can increase the customer bases
• Business gains customers and assets from the business taken over
• Acquisitions can result in new knowledge, skills and experience.

Disadvantages

• Integration can take time and resources away from core activities.
• Diseconomies of scale may occur if the business becomes too large, which leads to higher unit costs.
• Acquisitions can result in job losses, harming motivation and morale.
• The business taking over may not have the management skills or experience to run the acquired business successfully.
• Diversification can be a high risk growth strategy - it is easy to buy the wrong business, at the wrong price for the wrong reasons.