methods of growth

Question 1

what are 4 advantages of diversification?

Answer 1

• spreads risk across different markets

• targets new markets increasing customer base

• business gains customers and assets from the acquired business

• experience/ knowledge can be gained from the acquired business

Question 2

what are 2 disadvantages of diversification?

Answer 2

• Entering into new markets may affect core activities as resources and expertise need to be shared

• May not have the knowledge required to successfully run the new business

Question 3

what is diversification?

Answer 3

• Diversification is when firms move into new markets that are different from their core business.

• Conglomerate integration - when a business moves into an entirely different market for example a grocery store merging with a bank, or a company like Ford (car manufacturing) merging with Nokia (technology and communications)

• Lateral integration - when a business moves into a different market but within a related industry for example a hairdresser merging with a beauty therapist

Question 4

what is vertical integration?

Answer 4

Vertical integration occurs when firms at different stages of the production process merge together. There are two types called forward and backwards

Question 5

what is backward vertical integration?

Answer 5

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

Question 6

what are 3 advantages of backward vertical integration?

Answer 6

• Guarantees the quality of inputs and the supply of stock

• cuts out the middle man leading to increased profits

• more limit supplies to competitors

Question 7

what is one disadvantage of backward vertical integration?

Answer 7

Entering into new markets may affect core activities as resources and expertise need to be shared

Question 8

what is forward vertical integration?

Answer 8

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.

Question 9

what are 3 advantages of forward vertical integration?

Answer 9

• guarantees an outlet to sell products

• cuts out the middle man leading to increased profits

• more control over pricing and product display

Question 10

what is one disadvantage of forward vertical integration?

Answer 10

Entering into new markets may affect core activities as resources and expertise need to be shared

Question 11

what is horizontal integration?

Answer 11

• Horizontal integration is when two companies at the same stage of the production process merge or take over each other.
• If Ford Motor Company merged with Toyota Motor Company that would be an example of horizontal integration.

Question 12

what are 3 advantages of horizontal integration?

Answer 12

• removes a competitor from the market
• opportunity and job losses may occur
• business gains a greater market

Question 13

what are 3 disadvantages of horizontal integration?

Answer 13

• hostility and job losses may occur

• changes within the business could impact negatively on customer loyalty

• can be expensive to purchase another company

Question 14

what is organic growth?

Answer 14

Organic growth is when a business grows naturally. This can be achieved through:
• hiring more staff and equipment to increase its output
• opening new outlets
• introducing new products

Question 15

what are 5 advantages of organic growth?

Answer 15

• no loss of control as outsiders are not involved

• hiring new 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

Question 16

what are 3 disadvantages of organic growth?

Answer 16

• can be a slow method of growth
• may be limited by the size of the market
• restricted by the amount of finance available