Sizes of businesses

Question 1

What is organic growth?

Answer 1

Organic growth is when a firm increases its output, through increased investment by opening up more branches, investing in capital equipment, or recruiting more labour to fulfill the growing demands of the business.

Question 2

What is inorganic growth?

Answer 2

Inorganic growth is when firms grow through a merger/takeover by pairing up with one company or acquisition a company through the stock exchange.

Question 3

What are the three different types of mergers and takeovers?

Answer 3

Horizontal Integration

Vertical integration

Conglomerate integration

Question 4

What is horizontal integration?

Answer 4

Horizontal integration is a merger between two companies in the same industry in the same stage of production.

Question 5

What is vertical integration?

Answer 5

Vertical integration is when two firms in the same industry at two different stages of production merge together to carry out both operations simultaneously.

Question 6

What is the difference between backward and forward vertical integration?

Answer 6

Backward vertical integration is when a firm take over a previous stage in the production process such as a manufacturer taking over a supplier or a retailer taking over a manufacturer. Forward vertical integration is when a forward stage of the production process is undertaken such as a manufacturer owning a retail outlet or a supplier taking on the role of manufacturing goods.

Question 7

What is Conglomerate integration?

Answer 7

This is when one company takes over another company in a completely different industry.

Question 8

What are the disadvantages of a merger or a takeover?

Answer 8

A merger can cause corporate culture clashes. Moreover, a merger or takeover can be very costly and the firm that is taking over may pay too much. Secondly, the share prices of the company can fall drastically as existing investors will have lower faith in the company.

Question 9

List the benefits of vertical integration

Answer 9

Vertical integration lowers risks as it helps to takeover more stages in the supply chain which allows it to gain market dominance. This lowers competition as the firm can gain a greater market share and an ability to set prices with better control of its distribution channels and guaranteed supply of raw materials.

Question 10

List the drawbacks of vertical integration

Answer 10

When a business does not focus on its key core competencies it will lack the experience to handle new tasks in the new processes it is involved in which can raise costs. This is likely to raise costs. Furthermore, a business can pay too much to take over a firm or a particular stage of production. Costs of integration can be high and there may exist a duplication of resources or employees such as two senior managers, causing diseconomies of scale.

Question 11

List the advantages of horizontal integration

Answer 11

Horizontal integration allows firms to optimise the level of economies of scale it achieves. Secondly, as the business has experience and expertise in the industry, the merger or takeover is likely to be more successful.

Question 12

List the disadvantages of horizontal integration

Answer 12

The integration of the company can result in managers leaving the business due to a poor transition between the companies increasing diseconomies of scale.

Question 13

List the advantages of conglomerate integration

Answer 13

This allows a firm to diversify and lower risks as they are partnering up with completely new industries which lowers risks associated with a rapidly changing dynamic market. Further, conglomerates have the ability to gain access to finance easier as it’s business portfolio’s risks are spread out. This imposes lower risks for financial institutions. Cross-subsidization of profits and losses as well as resources can help a conglomerate to survive during difficult trading/ economic conditions. Lastly, it provides firms with an opportunity to perform asset stripping which allows the purchasing firm to make a profit over the acquisition.

Question 14

List the disadvantages of conglomerate integration

Answer 14

Again, a lack of business experience in a new industry can be challenging during integration rising costs. moreover, asset stripping does not benefit the local economy as consumers, workers and others will lose out as they will become unemployed and product choice will lower.

Question 15

What are the constraints on business growth?

Answer 15

The size of the market

Access to finance

Owners objectives

Government Regulation

Question 16

Develop the different constraints on business growth

Answer 16

The opportunities for expansion in certain markets are limited as they are catered to serve a niche market.

Small businesses are unable to gain access to finance from financial lenders as they have poor credibility and lack trading experience. Furthermore, small businesses are unable to raise finance through a stock exchange.

Certain owners, want to lead a particular lifestyle and may not want to take on the additional roles/ responsibilities to grow the business and hence will opt for profit satisficing.

Lastly, due to government regulations such as competition policy, planning permission denial, and other progressive tax schemes, businesses can be reluctant to grow their organisation as the risk involved is not rewarding.

Question 17

What is the impact on of the growth of firms on businesses?

Answer 17

Firms will be able to exploit economies of scale and improve their productive efficiency. Firms will also be able to develop new and innovative products and profitability is said to improve. Lastly, it will be able to capture a greater share of the market and this will help survive against competitors.
However, when the merger is unsuccessful, it can lead to diseconomies of scale.

Question 18

What is the impact on workers of business growth?

Answer 18

Workers will be able to gain a higher wage as the company is growing. However, due to a merger or takeover, ceratin workers may be made redundant.

Question 19

What is the impact on consumers of the growth of the business?

Answer 19

Consumers will benefit from more innovative products at lower prices if the merge results in greater efficiency and greater co-operation between the two firms. However, due to the merger, if the level of competition in the market lowers, consumers will have lower product choice and may not benefit from cost advantages.

Question 20

What is a demerger?

Answer 20

A demerger is when a firm splits itself into 2 or more separate parts to create individual firms .

Question 21

Why would a demerger occur?

Answer 21

Due to a lack of synergies

Lower Value of the business as a single entity

To focus on its core competencies

Question 22

Why would a lack of synergy cause a demerger?

Answer 22

A synergy exists when one part of the firm is contributing towards the most profitable and efficient running of the business other parts. A lack of synergy will lead to diseconomies of scale due to factors such as managerial diseconomies of scale which increases costs of the business and makes it uncompetitive.

Question 23

Why would a company’s overall value be lower when operating as a single entity?

Answer 23

A part of the company with a great growth prospect will be devalued because of the poor financial performance of another part of the business which can cause the value of the entity to lower, whereas demerged firms can benefit from higher value in total in the stock market.

Question 24

Why has increased focus on a limited range of products/ processes benefited demerged firms?

Answer 24

When a business focuses on its main core competencies it will be able to benefit from greater specialization and expertise as managers can focus on the core products of the business which can lead to greater success in the overall operations of the firm.
This is relatively more successful than the diversification strategy in most cases.

Question 25

What will be the impact on the business due to a demerger?

Answer 25

Firms will benefit from a demerger if it leads to increased specialization which can lower unit costs and make a firm more competitive in the market which allows it to gain a greater market share. This will also pose the opportunity of producing new products as firms will be able to focus on their core product lines than selling a wide range of goods.

Question 26

What will be the impact of a demerger on workers?

Answer 26

Demergers can benefit senior personnel in the firm they will be able to occupy two separate positions in the two different parts of the firm. However, if the demerger leads to greater efficiency, job losses are likely to occur lower down the organizational hierachy.

Question 27

What will be the impact of a demerger on consumers?

Answer 27

When the demerger results in greater efficiency, consumers will have to pay lower prices and will benefit from greater quality products as they are able to specialise and focus on their core product lines.