Types Of Growth

Question 1

Two ways businesses grow (2)

Answer 1

External
Internal / organic

Question 2

What is internal growth and exmaple (2)

Answer 2

Firm increase output - invest more or hire more workers
Tesco = opened more stores in uk

Question 3

What is external growth (2)

Answer 3

Merger is the joining together of two or more firms under common ownership
A takeover is where one company wants to buy out the other company

Question 4

Types of integration (3)

Answer 4

Vertical
Horizontal
Conglomerate

Question 5

What is horizontal integration

Answer 5

merger between two firms in the same industry at the same stage of production

Question 6

What is vertical integration (2)

Answer 6

Two firms merge that are at different stages in production
Forward production integration or Backward production integration

Question 7

What is conglomerate integration

Answer 7

Two firms merge with no common interest

Question 8

Positives of organic growth (3+)

Answer 8

Less risk than external growth = builds on a businesses strengths = brands + customers
Can be financed through internal funds = retained profits
Allows the business to grow at a more sensible rate

Question 9

Negatives of organic growth (3)

Answer 9

Hard to build market share if business is already a leader
Slow growth – shareholders may prefer more rapid growth
Franchises can be hard to manage effectively

Question 10

Benefits of vertical Integration (3+)

Answer 10

Control of the supply chain = helps to reduce unit costs and improve the quality of inputs into the production process
Improved access to key raw materials perhaps at the expense of rivals who must then pay more for them
Removing suppliers and taking market intelligence away from competitors = less contestable market = increases a firm’s market power

Question 11

Negatives of vertical integration (2+)

Answer 11

Fewer economies of scale because production is at different stages of supply
Problems of communication and coordination within the bigger more disparate firm = diseconomies of scale where the new bigger firm is more inefficient

Question 12

Horizontal integration positives (3+)

Answer 12

Exploit internal economies of scale = bulk-buying + technical economies + financial economies
Reduces competition by removing key rivals = this increases market share and lifts a firm’s pricing power
Buying an existing and well-known brand = cheaper in the long-run than organically growing a brand = entry barriers higher for potential rivals = higher long-run monopoly profits

Question 13

Disadvantages of horizontal itnegtaion (2+)

Answer 13

Risk of diseconomies of scale from the enlarged business = clashes of management style and culture
Reduced flexibility = the addition of more personnel and processes = more transparency = more accountability and red tape = slow down the rate of innovation / getting new products to market

Question 14

Example of horizontal merger not going through (2+)

Answer 14

2019 = merger between Sainsbury’s and Asda in the UK was blocked
Competition authorities feared it would leave consumers worse off = restricted choice and higher prices

Question 15

Conglomerate integration positives (3)

Answer 15

Diversification = spread risk = reduce dependency on one product
Increased revenue = more sources
Economies of scale = share resources + reduce costs

Question 16

Disadvantages of conglomerate integration (2)

Answer 16

Difficult to manage = principle agent problem
Not expert in industry