LS2 : Business Growth Flashcards
why is it important for some firms to gain market power?
gain market share —> dominant in market —> exercise control over market price —> influence market
what is internal growth also known as?
organic growth
what is external growth also known as?
inorganic growth
what is organic growth?
growth based on the firms own success and resources. eg. a successful marketing campaign may increase a firms market share, and provide it with a flow of profit. some firms may choose to borrow in order to finance growth by issuing shares.
what is inorganic growth?
firms growing by merging with or acquiring other firms. an acquisition may be hostile, a merger may the coming together of equals - forming a single entity
what are the advantages of organic growth?
- lowest risk form of growth
- control of firm remains unchanged
- better for workers morale
- creates more job opportunities, with increased managerial roles
- firms can continue to build on consumer expectations
what are the disadvantages of organic growth?
- tends to be slow
- builds on existing knowledge so people unaware of new ideas
- workers unwilling to contribute to growth
- diversification may happen due to saturation in the market, but can be risky into unknown markets
what are the advantages of inorganic growth?
- allows rationalisation to take place within the organisation
- instant access to increased economies of scale (horizontal)
- increase in market share / power (horizontal)
- greater control of supply chain (vertical)
- less subject to interruptions in supply (vertical)
- diversified portfolio of production reduces vulnerability to recession (conglomerate)
- possibility for cost saving if firms can find synergies eg. accounting and marketing (conglomerate)
what are the disadvantages of inorganic growth?
- incompatibility of of corporate cultures
- large gains in market share can attract attention of the regulator
- managerial diseconomies if management do not understand all aspects of new market (conglomerate)
- costs of mergers are underestimated
- computer or production systems not compatible
- market share or profits do not arise
- reversing process of mergers or acquisitions can be costly
what is a horizontal merger?
merger between firms operating in the same industry. affects the degree of market concentration, as there are fewer independent firms operating.
what is a vertical merger?
merger of two or more companies that provide different supply chain functions for a common good. merger is done to increase synergies and gain more control of the supply chain process
what are the two types of vertical merger?
- backward integration
- forward integration
give an example of backward integration.
car company merging with a component supplier
give an example of forward integration.
car assembly plant merging with a large distributor
what is a conglomerate merger?
merger of two firms operating in different markets. eg. unilever and nestle
