LS2 - Buisness Growth Flashcards
How businesses grow
- internal growth aka organic growth
- external growth aka inorganic growth
Internal growth aka organic growth
- some grow due to success - more profit which can be reinvested to expand firm even more
- some borrow to finance growth - can issue shares (equity)
- if a market is saturated, a firm may growth at the expense of another, if that doesn’t work a firm may need to diversify
- can find new markets for products or offer new ones
- diversifying can be seen as risky as they are inexperienced going against rival firms that know the business - depends on management quality
External growth aka inorganic growth
- can merge/acquire other firms
- acquisition can be hostile but merger is the coming together of two equals
- can allow rationalisation - efficiency improves or may be incompatible due to work culture
3 types of mergers
Horizontal
Vertical
Conglomerate
Horizontal merger
- firms in same industry & production stage
E.g. takeover of rover by BMW in 1994 - known as horizontal integration
- can affect degree of market concentration as after merger there are fewer independent firms in market, may increase market power of new firm
Vertical merger
- can be upstream or downstream
- when same market but different production stage
- backwards integration - car company merges with component supplier, earlier part in process
- forwards integration - assembly plant merge with distributer - later stage in process
- producers of cars often work on a just-in-time basis & order as needed, creates vulnerability as if supply stops so does production, but if merged it can improve reliability and make it harder for rival firms
Conglomerate merger
- two firms fair operate in different markets/industries e.g. nestle & Unilever
- can reduce risk for firms as firms go through fluctuations, may not be synchronised so can even out activity over all
- may not be efficient as different businesses need different skills & specialties
Organic growth advantages & disadvantages
- lowest risk form of growth, control of firm unchanged, builds on existing strengths, good for worker’ morale as more opportunities & management roles
- slow building on existing knowledge of existing workers, so may not know new ideas or unwilling to take on new ideas
Inorganic growth advantages & disadvantages
general
- underestimate merging costs, systems may not be compatible, corporate culture collides
horizontal
- instant access to economies of scale, more market share & power
- can lead to more attention from regulator
vertical
- greater control over supply chain, less subject to interruptions in supply, more control over margins at each stage of production process
conglomerate
- diversified portfolio leads to firm less vulnerable to recession
- cost saving possible if can find synergies in core business functions e.g. financial accounting & marketing
- may be managerial diseconomies if management team don’t get all aspects of new diversified business
Reasons for demergers
- may be too large & experience diseconomies of scale
- businesses & managers lose focus over data to day management of firm & long run average costs increase
- to avoid this firms demerge & create smaller firms to concentrate on specialist areas & maximise their land economies of scale increasing shareholder value & profit
Impact of demergers
- makes business smaller, so can have less market control & shares & less monopoly power
- can make it less profitable or more if it becomes more efficient
- workers can gain as two of each thing is needed or can loose jobs if each firm runs more efficiently
- consumers tend to have short term problems e.g. bank name may change & branches may shut down
- if instigated by gov like CMA required Lloyds TSB to be demerged can have good LT effect as the aime is to create more competition & therefore lower prices & more choice for the consumer
