L2- How Business grow Flashcards
what is organic growth
- growth by being successful e.g. marketing campaign = market share up= profit= reinvestment
- some may choose to borrow to finance growth e.g. issuing shares
- limits- product market saturated= expand at expense of other firms in market/ if competitors able to maintain own market shares= diversify
- diversify= finding new market for product, or creating new product
- e.g. tescos- branches overseas, new financial services
- diversification= dangerous= market where firm is inexperienced with existing experienced rival firms= may depend on quality of management team
types of external growth (inorganic growth)
-acquisition
horizontal merger
- vertical merger (backward and forward integration)
- conglomerate merger
acquisition (takeover)
- hostile
merger
- both firms agree to it
horizontal merger
- between firms operating in same industry and same stage of production
- e.g 2 car assembly firms- takeover of Rover by BMW
- results in horizontal integration
- affects degree of market concentration= fewer independent firms in market= increase market power of new firm
vertical merger
- backward integration- downstream- merging with firm involved in earlier part of production process
- forward integration- merging with firm involved in later part of production process
- may allow rationalisation of process of production e.g car producers- JIT= potential vulnerability= improved reliability and confidence= more difficult for rival firms
conglomerate merger
- merging of 2 firms operating in different markets e.g. nestle and unilever
- reduce risk faced by firms- markets follow fluctuations in line with business cycle = operating in no. of markets on diff cycles- even out activity overall
- not necessarily efficient way of doing business- diff activities undertaken require diff skills and specialism
advantages and disadvantages of organic growth
+ lowest- risk form of growth
+ remain control over firm= build on existing strength= meet consumer expectations
+ good for workers morale
+ more job opportunities within firm, increased scope for managerial roles
- slow, builds on existing knowledge of existing workers=ppl may be unaware of new ideas or innovations or unwilling to take on new ideas if they involve change
advantages and disadvantages of horizontal mergers
+ instant access to increased economies of scale, increase in market share= increased market power
- also disadvantage as attracts attention of regulator
advantages and disadvantages of vertical mergers
+ greater control over supply chain= has own suppliers, less subject to interruptions in supply= more control over margins at each stage of production process
advantages and disadvantages of conglomerate merger
+ diversified portfolio of production activities= firm less vulnerable to recession\
+possibilities for cost savings if merged firms can find synergies in core business functions such as accounting and marketing
- managerial diseconomies if management team do not understand all aspects if the diversified business
general disadvantages of mergers
- cost of integrating is underestimated before event
- computer or production systems may not be compatible
- may not be as easy as expected to make staff cuts
- corporate cultures may collide esp when merger takes place across national borders= expected gains i market share or profits do not materialise
- reversing process can be costly
reasons for demergers
-grow too large= managers lose focus of day to day management of firm= long run average cost increase= diseconomies of scale= demerge to create smaller firms, able to focus on specialist areas and maximise own economies of scale= increase in shareholder value and profits= parts of biz may also be shut, loss in jobs
