LS2 - Business Growth

Question 1

Why have firms like Microsoft, Walmart, and Google become giants?

Answer 1

Firms like Google increase their size to gain market share and thereby gain market power to exercise control over prices, and influence the market.

Question 2

What is internal (organic) growth?

Answer 2

Internal growth occurs when a firm grows by reinvesting profits or borrowing to finance expansion. Usually firms grow organically when they experience success and recieve an increased flow of profits.

Question 3

What is a limit to internal growth?

Answer 3

Product market saturation which would mean that any growth they experience can only come at the expense of other firms in the market.
internal growth may then require diversification or finding new markets for further growth.

Question 4

Provide examples of firms using diversification for growth.

Answer 4

Tesco opening branches overseas and introducing financial services; Microsoft selling new products like media players as a firm which initially sold internet browser. Diversification allows firms to reduce risk by entering new markets or industries.

eval point: the success of movng into a new market is dependent on the competitiveness of existing rival firms, and the impact of the firms inexperience in the market

Question 5

What is external (inorganic) growth?

Answer 5

Growth achieved by merging with or acquiring other firms, either through hostile takeovers or mutual mergers. External growth can rapidly expand a firm’s operations and market presence.

Question 6

What are the advantages of external growth? (+eval)

Answer 6

Rationalization, instant access to economies of scale, increased market share, and control over the supply chain.

eval point: some merger have founmdered in the past because of the inconpatibility of corporate cultures

rationalisation: reorganizing to enhance efficiency, whether through structural changes or strategic shifts.

Question 7

What is a horizontal merger?

Answer 7

A merger between firms in the same industry and stage of production, like two car assembly firms. Horizontal mergers aim to consolidate market power within a specific industry. The final result is a horizontal integration

this can also impact the market concentration, after the merger there are fewer independent firms operating in the market. The new firm has increased market power.

Question 8

What is a vertical merger?

Answer 8

A merger between firms at different stages of the production process, either backward integration (with suppliers) or forward integration (with distributors). Forward intergation is a car assembly plant merging with a car distributor.

Vertical mergers seek to streamline the production process and control key elements of the supply chain.

Question 9

what are the positives of a vertical merger

Answer 9

• vrtical integration may allow rationalisation
• it resolves potential vunerabilites to supply side shocks
• improves the reiability and confidence in the just-in-time oricess and help to improve competitiveness against rival firms

Question 10

What is a conglomerate merger?

Answer 10

A merger between firms who operate in different markets/industries, like Unilever and Nestlé, to diversify and reduce risks.
This can help to reduce the risks faced by firms as they even out their activity throughout the business cycle
however, this type of merger can lead to reduced efficiency and has becomme less popular because the different industries require different skills and secialisms.

Example sentence: Conglomerate mergers allow firms to enter new markets and spread risk across multiple industries.

Question 11

What are the advantages of organic growth?

Answer 11

Lower risk, unchanged control, building on existing strengths, meeting consumer expectations, and improved worker morale (because of more job oppurtunities within the firm and an increased scope for management roles).

Additional information: Organic growth strategies focus on gradual expansion and sustainable development.

Question 12

What are the disadvantages of organic growth?

Answer 12

Slow growth and potential resistance to new ideas or innovations.

Eval: Organic growth may limit a firm’s ability to quickly adapt to changing market conditions.

Question 13

What are the advantages of inorganic growth through horizontal mergers?
+ one disadvantage

Answer 13

Instant economies of scale, increased market share, and potentially increased market power.

one possible disadvantage of this may be increased attention from regulators

Example sentence: Horizontal mergers can lead to enhanced competitiveness and market dominance.

Question 14

What are the advantages of vertical mergers?

Answer 14

Greater control over the supply chain, improved reliability, and reduced vulnerability to supply interruptions. Alos, more control over margins at each stage of the production process

Example sentence: Vertical mergers aim to streamline operations and enhance efficiency.

Question 15

What are the advantages of conglomerate mergers?
Paired disadvantage

Answer 15

Diversified portfolio reduces vulnerability to recession and potential cost savings through synergies in business functions e.g. in financial accounting and marketing.

However, there may be a rsk of managerial diseconomies if the management team don’t understand all aspects of the new diversified business

Example sentence: Conglomerate mergers offer firms the opportunity to spread risk and access new revenue streams.

Question 16

What are the potential issues with mergers?

Answer 16

Integration costs, incompatible computer/production systems, management/corporate culture conflicts, and the potential costs of reversing mergers.

Example sentence: Mergers can face hurdles due to differing corporate cultures and operational structures.

Question 17

What is a demerger?

Answer 17

A firm breaking up into smaller entities to reduce diseconomies of scale and increase focus on specialist areas.

Example sentence: Demergers are often undertaken to streamline operations and enhance strategic focus.

Question 18

Why might a firm demerge?

Answer 18

To avoid or reduce diseconomies of scale (increased output causes managers to lose sight of day-to-day management causing long-run average costs to increase), increase shareholder value, and focus on core competencies.

sometimes demergers are required by the government when a business is acting against public interest

competency is a skill, expertise or ability that helps you to do a job

Example sentence: Firms may choose to demerge to unlock value and refocus on key business segments.

Question 19

Give examples of demergers.

Answer 19

Foster’s Group demerging its wine and beer divisions, and Lloyds TSB Banking Group creating separate banks, TSB and Lloyds Bank.

Example sentence: Demergers are common in industries where distinct business units can operate more effectively independently.

Question 20

What is the impact of demergers on businesses?

Answer 20

Demergers makes the business smaller which causes reduced market control, potential increased efficiency, and possible profitability changes.

Example sentence: Demergers can lead to strategic realignment and refocusing of business objectives.

Question 21

How can demergers affect workers?

Answer 21

Potential promotions for senior managers, but also possible job losses due to increased efficiency.

Example sentence: Demergers may result in organizational restructuring and workforce adjustments.

Question 22

What is the impact of demergers on consumers?

Answer 22

Short-term disruptions like name changes and branch closures, but long-term benefits like increased competition, lower prices, and more choices.

Example sentence: Consumers may experience initial inconveniences but can benefit from enhanced market competition.