Types Of Growth Flashcards
Two ways businesses grow (2)
External
Internal / organic
What is internal growth and exmaple (2)
Firm increase output - invest more or hire more workers
Tesco = opened more stores in uk
What is external growth (2)
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
Types of integration (3)
Vertical
Horizontal
Conglomerate
What is horizontal integration
merger between two firms in the same industry at the same stage of production
What is vertical integration (2)
Two firms merge that are at different stages in production
Forward production integration or Backward production integration
What is conglomerate integration
Two firms merge with no common interest
Positives of organic growth (3+)
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
Negatives of organic growth (3)
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
Benefits of vertical Integration (3+)
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
Negatives of vertical integration (2+)
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
Horizontal integration positives (3+)
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
Disadvantages of horizontal itnegtaion (2+)
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
Example of horizontal merger not going through (2+)
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
Conglomerate integration positives (3)
Diversification = spread risk = reduce dependency on one product
Increased revenue = more sources
Economies of scale = share resources + reduce costs
