Methods of business growth

Question 1

Explain Organic or Natural Growth

Answer 1

Organic growth means the business grows naturally by expanding its sales or its operations. A business can grow organically by:

• Hiring more staff and equipment to increase its output.
• Opening new outlets or selling in a different location.
• Developing or introducing new products.
• Marketing activities, such as advertising and sales promotion, to increase demand.
• Franchising – selling to a franchisee the right to sell the product or service of the business.

Question 2

Explain Horizonal Integration

Answer 2

Horizonal integration – often referred to as a Merger - is where two or more businesses agree to join together to become one larger firm. If, say, Levis joined with Wrangler to make one firm producing denim clothing, this would be an example of horizonal integration

Question 3

Explain Vertical Integration

Answer 3

Vertical integration occurs when a business takes over another business buy buying its assets or operations (usually called Acquisition). There are two kinds:

• Forward vertical integration – when a business takes over a company at a later stage in the production process. For example a clothing manufacturer taking over a retail high street business.
• Backward vertical integration – when the business takes over a company at an earlier stage in the production process for example a supermarket chain taking over a dairy farm.

Question 4

Explain Diversification

Answer 4

Diversification happens when firms move into new markets that are different from their core business. There are two types of diversification.

• Conglomerate integration – when a business moves into an entirely different market, eg, a sportswear manufacturer merging with a technology and communications company.
• Lateral integration – when a business moves into a different market but within a related industry, for example a health club merging with a beauty therapist.