Methods of Growth

Question 1

What is internal/Organic growth?

Answer 1

This means businesses deciding to grow on their own without getting involved with one other organisation.

Question 2

What are methods of internal/organic growth?

Answer 2

Launching new products - Business 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.

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

Introducing e-commerce - By selling online, a business can trade 24/7 to a global market.

hiring more staff - Increasing the number of staff will improve the business’s ability to make sales, make better decisions and develop more products.

Increasing production capacity - Business can invest in new technology to make more products themselves.

Question 3

What are the advantages of internal/organic growth?

Answer 3

• No loss of control to outsiders as growth is internal.
• Hiring more staff could bring more ideas to their business.
• Investing in new equipment will increase production capacity.

Question 4

What are the disadvantages of internal/organic growth?

Answer 4

• Business may be restricted by the amount of finance they have available.
• Can be a slow method of growth.
• May be limited by the size of market.

Question 5

What is Diversification?

Answer 5

This is when products are launched across different markets.

Example - Samsung sold mainly mobile technology but also now refrigerators and washing machines.

Question 6

What is Horizontal Integration?

Answer 6

This occurs when two businesses from the same sector of industry become one business. This could be two dairy farms merging.

Question 7

What are the advantages of Horizontal Integration?

Answer 7

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

Question 8

What are the disadvantages of Horizontal Integration?

Answer 8

• The merger/takeover may breach EU competition rules.
• Quality may suffer due to lack of competition.
• Customers may have to pay higher prices for same goods.

Question 9

What is Forward Vertical Integration?

Answer 9

This is when a business takes over or merges with a business in a later sector of industry, often a distributor.

Example - manufacturer of mobile phones, such as HTC, taking over a mobile phone shop, such as Carphone Warehouse.

Question 10

What are the advantages of Forward Vertical Integration?

Answer 10

• The business can control supply of its products and could decide to not supply to competition.
• Can increase profits by ‘cutting out the middle man’ and adding value itself.

Question 11

What is Backward Vertical Integration?

Answer 11

This is when a business takes over or merges with a business in an earlier sector of industry. (They take over their supplier).

Question 12

What are the advantages of Backward Vertical Integration?

Answer 12

• Guaranteed and timely supply of inventory (stock).
• No need to pay a supplier its marked-up prices so inventory is cheaper.
• Quality of suppliers can be strictly controlled.

Question 13

What are disadvantages of FVI and BVI?

Answer 13

• 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 repercussions.

Question 14

What is Lateral Integration?

Answer 14

This refers to when business aquires or merges with a business that is in the same industry but does not provide the exact same product.

Question 15

What are advantages of lateral Integration?

Answer 15

• 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.

Question 16

What are the disadvantages of lateral Integration?

Answer 16

• The lack of knowledge in a slightly different market may affect the performance of the products.
• It may adversely affect core activities.

Question 17

What is conglomerate Integration?

Answer 17

Conglomerate Integration occurs when businesses in different markets join together.

Question 18

What are advantages of conglomerate Integration?

Answer 18

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

Question 19

What are the disadvantages of conglomerate Integration?

Answer 19

• One business may take on another in a market they know nothing about and this may cause the new business to fail.
• Having too much 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.