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Higher Business-Understanding Business > Methods Of Growth > Flashcards

Methods Of Growth Flashcards

1
Q

Methods of growth include…

A
  • organic
  • horizontal
  • forwards vertical
  • backwards vertical
  • lateral
  • conglomerate
  • diversification
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2
Q

What is internal/organic growth and what does this increase?

A
  • This means businesses deciding to grow on their own without getting involved with other organisations
  • growing in this way will increase market share without losing control of the business to outsiders
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3
Q

Internal/organic growth methods

A
  • launch a new products/services
  • opening new branches are expanding existing branches
  • introducing e-commerce
  • hiring more staff
  • increasing production capacity 
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4
Q

Launching new products/services

A

Businesses can meet the needs of different market segments, especially if they diversify, i.e. launch new products into different markets from their current ones or export existing products abroad.

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5
Q

Opening new branches are expanding existing branches

A

A business can reach new markets by opening up in new locations. It can also expand existing premises to cater for more product/staff and more customers, make more sales

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6
Q

Introducing e-commerce

A

By selling online a business can trade 24/7 to a global market

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7
Q

Hiring more staff

A

Increasing the number of staff will improve the businesses ability to make sales, make better decisions and develop more products

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8
Q

Increasing production capacity

A

Businesses can invest in new technology to make more products themselves

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9
Q

Advantages and disadvantages of internal/organic growth

A

Advantages
-no loss of control as outsiders are not involved
-hiring more staff will bring new ideas
-investing in new equipment will increase production capacity
-Opening new branches means the company can reach new markets
-less risky than a takeover

Disadvantages

  • can be slow method of growth
  • may be limiting the size of the market
  • restricted by the amount of finance available
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10
Q

What is Diversification? And why is it good and bad?

A

This is when products are launched across different markets for example, Samsung sell mobile phones, tablets and TVs but also refrigerators and washing machines.

Good
-this clearly this increases potential customers and spread the risk across different markets

Bad
however, it does require numerous resources to offer such a vast product range i.e. a business may need to use a product grouping

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11
Q

What is horizontal integration?

A

Horizontal integration occurs when two businesses from the same sector of industry become one business. This could be two dairy farms merging (primary sector) or one bank taking over another bank (tertiary sector)

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12
Q

Advantages and disadvantages of horizontal integration

A

Advantages

  • The new larger businesses can dominate the market as competition will be vastly reduced
  • The new business can benefit from economies of scale e.g. buying in bulk to reduce prices
  • do to reduced competition, the new larger business can raise prices, increase in profits

Disadvantages

  • The merger/takeover may breach EU competition rules
  • Quality may suffer due to lack of competition
  • customers may have to pay higher prices for the same goods
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13
Q

What is vertical integration?

A

Vertical integration occurs when two businesses at different stages of the production process and different sectors of industry become one business

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14
Q

Deintegration

A

When vertically integrated businesses separate it is known as deintegration

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15
Q

What is forward vertical integration ?

A

when a business takes over a company at a later stage in the production process for example a customer such as a retail outlet for selling goods.

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16
Q

Advantages of forward vertical integration

A
  • The business can control supply of its products and could decide to not supply to competition
  • can increase profits by ‘cutting out the middleman’ and adding value itself
  • Guarantees an outlet to sell products
  • More control over pricing and product display
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17
Q

What is backward vertical integration?

A

when the business takes over a company at an earlier stage in the production process for example its supplier/source of goods and materials

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18
Q

Advantages of backward vertical integration

A
  • guaranteed and timely supply of inventory (stock)
  • no need to pay the supplier it’s marked-up prices so inventory is cheaper
  • Quality of supplies can be strictly controlled
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19
Q

Disadvantages of both forward vertical integration and backward vertical integration

A
  • Company may be incapable of managing new activities efficiently meaning higher costs
  • focusing on new activities can adversely affect core activities
  • Monopolising markets may have legal reprecautions
20
Q

What is lateral integration?

A

This is when a business acquires or emerges with a business that is in the same industry but does not provide the same product.
for example a hairdresser merging with a beauty therapist

21
Q

Advantages and disadvantages of lateral integration

A

Advantages

  • The business can target new markets and therefore increase sales
  • New products can complement existing ones e.g. if a suit company bought a shirt maker both could then be sold as a complete outfit for a customer to wear

Disadvantages

  • The lack of knowledge in a slightly different market may affect the performance of the products
  • it may adversely affect core activities
22
Q

What is conglomerate integration?

A

Conglomerate integration occurs when businesses in different markets join together, in other words a merger of the businesses whose activities are totally unrelated.

23
Q

Advantages and disadvantages of conglomerate integration

A

Advantages

  • The business can spread risk. If one market fails, the losses can be compensated for the profits in another
  • it can overcome seasonal fluctuations in the market and have more consistent year-round sales
  • The business is larger and therefore more financially secure
  • The buyer requires this assets of the other company
  • The business gains the customers and sales of the acquired business

Disadvantages

  • One business may take on another in a market they know nothing about and this may cost the new business to fail
  • having too many products across different markets can cause the company to lose focus on core activities, impacting on other products
  • The business may become too large and inefficient to manage
24
Q

What are ways to achieve growth?

A
  • mergers
  • acquisitions
  • takeovers
  • franchising
  • becoming a multinational
  • product development, advertising, increasing staffing
25
Q

Mergers

A
  • A merger involves two businesses agreeing to join forces and become one organisation.
  • This is often friendlier than an takeover and can result in a new name and logo for the new, merged organisations
26
Q

Advantages and disadvantages of mergers

A

Advantages

  • market share and resources are shared which can spread risk of failure and increase profits
  • economics of scale can be achieved
  • each business can bring different areas of expertise to the merger
  • unlike a takeover, jobs are more likely to be spared in both businesses
  • can overcome barriers to entering a market, such as strong competition

Disadvantages

  • customers may dislike the changes a merger may bring e.g. new logo, new name , etc as the familiarity of the previous businesses are lost
  • marketing campaigns to inform customers of changes can be expensive
  • can be bad for customers as less competition will mean higher prices
27
Q

What are takeovers and why is it hostile?

A
  • a takeover involves one business (usually a larger business) buying another (usually smaller) business.
  • this can often be hostile and comes as a result of the smaller business struggling financially and the larger business exploiting the situation
28
Q

Advantages and disadvantages of takeovers

A

Advantages

  • the buying business gains the market share and resources of the taken-over business
  • risk of failure can be spread
  • economies of sale can be achieved
  • competition is a reduce which will increase sales

Disadvantages

  • integration can lead to job losses in the taken-over business as the buying business wants it’s owm management and employees
  • if the buying business moves the headquarters or production to its home country/area, this can have a bad effect on the taken/over business’s local economy
  • interrogation can be bad for customers as less competition means higher prices
  • A change of name can put off loyal customers of the taken-over business
  • it could be expensive to acquire another business
29
Q

What is acquisition?

A

An acquisition is when one company buys the assets or operations of another company.

30
Q

What is franchising?

A

Franchising is where a business leases its idea to franchisees. This allows new branches to open across the country and internationally. Many well-known high street opticians and burger bars are franchises. A franchise is a joint venture between:

  • a franchisee, who buys the right from a franchisor to copy a business format
  • a franchisor, who sells the right to use a business idea in a particular location
31
Q

Becoming a multinational

A

By becoming a multinational a business will expand its operations to operate in more than one country. This will allow the company to access new markets which can lead to an increase in sales and market share.

32
Q

Product development

A

Developing new products allows a company to target new markets and expand their product range.

33
Q

Advertising

A

Advertising can be used to increase awareness of a company’s products allowing them to grow organically or can be used to inform customers of new products

34
Q

Increasing staff

A

By increasing staff numbers, the productivity of a business will grow and there may be increased levels of customer satisfaction.

35
Q

Ways of funding growth include:

A
  • retained profits
  • divestment
  • deintegration
  • asset stripping
  • demerger
  • buy-in
  • buy-out
  • outsourcing
36
Q

What is funding growth?

A

Growing a business doesn’t just happen. It has to be paid for and there are a number of ways that businesses can be funded to grow.

37
Q

What are retained profits?

A

These are any profits made by the business that aren’t given to shareholders. They are kept in the business to fund growth, such as developing new products.

38
Q

What is divestment and why might an organisation divest?

A
  • divestment is selling off part of an organisation, such as a subsidiary company or one one of the companies brands, it can also be when a company sells off an asset to raise finances.
  • an organisation may divest because it wishes to concentrate on other, more profitable areas of the business, focus on a specific target market or simply cash in on selling part of the organisation
39
Q

What is deintegration and how does it occur?

A

-this is when a business sells off part of the supply chain that it owns. It occurs when a business has become vertically integrated with either its supplier or customer and eventually realises that it would be better off as separate businesses.

40
Q

Advantages and disadvantages of deintegration

A

Advantages

  • The business can focus on core activities, for example if it is a manufacturer it can focus on making rather than farming or selling
  • there is increased choice in the ‘vertical chain’ as the business can now look for suppliers or customers outside its organisation

Disadvantages

  •  The business will now have to pay marked-up prices for supplies
  • competitors could acquire deintegrated components and take control of the supply chain
41
Q

What is asset stripping?

A

-this is taking over another company with intent to sell off its assets for a profit. The individual assets of the organisation, such as factories, retail spaces or fleet, may be more valuable than the organisation as a whole

42
Q

What can asset stripping cause?

A

-asset stripping can cause the buyers to gain a bad reputation as this often happens after a hostile takeover, with the profitable remains of the business being sold off, bit by bit, and the non-profitable areas being closed down

43
Q

What is demerging?

A

-a demerger occurs when a single business splits into two or more separate components -the de-merged components are still owned by the same organisation as before; however they are managed independently of each other

44
Q

Advantages and disadvantages of demergers

A

Advantages

  • each new ‘component’ can concentrate on its own core activities and grow as a result
  • each new component has the best chance to operate efficiently
  • De-merged components can be divested which can meet competition regulations, set by the EU

Disadvantages

  • customers may you put off by the de-merger and abandon the businesses altogether
  • there are significant financial costs involved, for example, in rebranding shop fronts, marketing campaigns to inform customers of the change, and so on
45
Q

Management buy-out/buy-in

A
  • Buy-outs occur when managers purchase the business from current owners.
  • A Buy-in occurs when a group of managers from outside the business buy into the business and take over its running.
  • in both cases, the management team will feel they have the ideas and industry knowledge to turn the business around and make it successful
46
Q

What is outsourcing and why would an organisation do this?

A
  • outsourcing also known as contracting-out, is when an organisation arranges for another organisation to carry out certain activities for it, instead of doing it itself.
  • A business could outsource its Administration, IT work, printing, legal services, marketing or accountancy.
  • An organisation will generally do this to concentrate on core activities
47
Q

Advantages and disadvantages of outsourcing

A

Advantages

  • outsourcing allows the business to concentrate on doing what it is good at rather than getting bogged down with additional services
  • less labour and equipment is required for outsource activities, for example, outsourcing printing saves on printers and reprographics staff
  • there should be high-quality work from the outsourced business as it should have greater expertise and specialist equipment
  • The outsourced business may provide the service cheaper than an in-house department could as it can benefit from economics of sale, doing the same work for many other businesses
  • The business is able to use the service when it is required, so saving costs on Idle staff and machinery

Disadvantages

  • The business will have less control over outsource work so quality may fail
  • Communication between the businesses need to be very clear to make sure exact specifications are met
  • The business may have to share sensitive information with the outsourced business that could get into the hands of competitors
  • outsourcing could be more expensive than in-house as specialists and expertise come at a price

Higher Business-Understanding Business (9 decks)

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