methods of growth - advantages and disadvantages

Question 1

what are the advantages of organic growth?

Answer 1

• no loss of control
• new staff can bring new ideas and experience
• introducing new products can reach different markets
• less risk than a takeover

Question 2

what are the disadvantages of organic growth?

Answer 2

• can be a slow method of growth
• may be limited by the size of the market
• finance to grow organically may be limited

Question 3

what are the advantages of horizontal integration?

Answer 3

• reduces competition if the acquired business is a rival in the market
• can result in economies of scale, which reduces unit costs
• increases market share which means the business can charge higher prices
• other businesses can bring new skills and specialist departments to the business
• larger businesses often find it easier to raise funds

Question 4

what are the disadvantages of horizontal integration?

Answer 4

• diseconomies of scale may occur if the business becomes too large, which leads to higher unit costs
• clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration
• may need to make some workers redundant, especially at management levels: this may have an adverse effect on motivation

Question 5

what are the advantages of vertical integration?

Answer 5

• guarantees a market to sell a product (forward)
• guarantees the quality of inputs and supply of stock (backward)
• cuts out the middle man leading to higher profits
• more control over pricing
• limits the supply to competitors

Question 6

what are the disadvantages of vertical integration?

Answer 6

• integration can take time and resources away from core activities
• diseconomies of scale may occur if the business becomes too large, leading to higher unit costs
• clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration
• may be a conflict of objectives between different businesses, meaning decisions are more difficult to make, causing disruption in the running of the business

Question 7

what are the advantages of diversification?

Answer 7

• spreads risk across different markets - new markets can increase the customer bases
• business gains customers and assets from the business taken over
• acquisitions can result in new knowledge, skills and experience

Question 8

what are the disadvantages of diversification?

Answer 8

• integration can take time and resources away from core activities
• diseconomies of scale may occur if the business becomes too large, which leads to higher unit costs
• acquisitions can result in job losses harming motivation and morale
• the business taking over may not have the management skills or experience to run the acquired business successfully
• diversification can be a high risk growth strategy: it is easy to buy the wrong business at the wrong price and for the wrong reasons