LS2 - How Businesses Grow Flashcards
Internal/organic growth
Firms could grow by being successful - they could become more well-known, increasing market power and profits
They can finance growth through issuing shares or through borrowing
This type of growth can be limited - a firm may only be able to grow at the expense of the other firms, if the product market is saturated. They might need to diversify their firm to find new markets for existing products or offer new products
Diversification is risky though - firm may be inexperienced in new market, and competition might be fierce, more expertise
External/inorganic growth
Firms can grow by merging with or acquiring other firms - acquisition might be hostile (takeover), but merging is coming together of equals to form a new single entity
Rationalisation can occur - reorganising to improve efficiency
But there might be culture clash between merged firms
Types of mergers
Horizontal merger - merger between firms in the same industry and the same stage of the production process - horizontal integration; may increase market power held by the new firm
Vertical merger - between firms operating in same industry but in different stages of the production process, upstream or downstream - forward integration: merging upstream (later part of process) ; backward integration: merging downstream (earlier part of process) - improve rationalisation and more efficient production
Conglomerate merger - between firms operating in different markets or industries - reduce risks faced by firms, but is not always an efficient merger
Examples of mergers
Horizontal - rover by BMW in 1994 or daimler-benz with Chrysler in 1998
Vertical - eBay and PayPal (eBay provides a platform that allows people to sell items, while PayPal allows buyers to pay for these items)
Conglomerate - Unilever and nestle
Organic growth advantages and disadvantages
A - • Pace of growth is manageable
• Less risky - as growth is financed
By profits and there is expertise in
The industry
• Avoid diseconomies of scale
D - • Pace of growth can be slow and Frustrating
• Access to finance may be limited • Not always able to benefit from
Economies of scal
Inorganic growth advantages and disadvantages
Horizontal:
A -• Rapid increase of market share
• Reduction in cost per unit due to
Economies of scale
• Reduces competition
• Firm can gain new knowledge and
Expertise
D - Diseconomies of scale can occur as
Costs increase (eg. Unnecessary duplication Of management roles)
• Culture clashes between two firms
Vertical:
A - Reduces cost of production
• Lower costs make firm more competitive • Reduce risk - greater control over supply
Chain = better access to raw materials • Forward integration increases profit as
Profits from the next stage of production
Are taken in
• Forward integration can increase brand
Visibility
D - • Diseconomies of scale occur as costs Increase (eg. Unnecessary duplication of Management roles
• Can be a culture clash between the two firms
• Possible little expertise in running the new firm
Leads to inefficiencies
Conglomerate:
A - Reduces overall risks of business failure • Increased size and connections in new
Industries and open opportunities for
Growth
• Parts of the new business can be sold for
Profit as they are duplicated in other Parts of the merger
D - • Possible lack of expertise in new products and Industries
• Diseconomies of scale can occur
• Results in job losses
• Worker dissatisfaction due to unhappiness as
The takeover can reduce productivity
Reasons for demergers
• Reducing diseconomies of scale - some firms may grow too large so demegers can reduce the cost per unit and
increase the profitability
• Cultural differences - sometimes differences are too conflicting and not worth the expense to change
• Increased business focus - If resources are scattered across a large number of firms it can be hard to maintain
focus - so narrowing the focus can improve profitability
• Comply with demands of competition commission (competition and market authority (CMA)) - firms may be
forced to demerge due to concerns about the high level of market share, which is considered to be anticompetitive and bad for consumers
Impacts of demergers on businesses, workers and consumers
Impact on firm:
• More narrow focus on the core business
• Remove loss making parts of the business
• Increased efficiency and lower cost per units
• Increase annual profit
• Remove cultural differences
Impact on workers:
• Workers may lose their jobs
• Removal of cultural differences can help build better team dynamics
• Smaller workforce for more opportunity for promotion
Impacts on consumers:
• If Successful - better quality of products and customer service
• If successful - lower prices due to firms efficiency
• If unsuccessful - less product range and worse quality/customer service
Demergers examples
Qantas demerged their airline business to run stand-alone domestic and international airline businesses
Pfizer sold their infant nutrition business to Nestle
In 2015 Yum Brands announced a demerger to create two separate businesses: Yum China and Yum Brands
Stages of production (sectors)
Primary sector (extraction of raw materials like mining)
Secondary sector (manufacturing things like cars)
Tertiary sector (provision of services like retailers)
Constraints on business growth
Size of market
Harder to access finances for smaller firms
Owner objectives - may not have business growth as important objective
Regulation - red tape which is excessive regulation can prevent quantity of output a firm produces. May limit the size that a firm chooses or is able to grow
