Unit 1 KA4- Methods of Growth

Question 1

Explain the benefits of growth to a business

Answer 1

Have more influence over market
You are big enough to be price setters
Often enjoy economies of scale

Question 2

Explain organic/internal growth

Answer 2

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 3

Give pros and cons of organic/internal growth

Answer 3

Pros
No loss of control as outsiders are not involved
Hiring more 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

Cons
Can be a slow method of growth
May be limited by the size of the market
Restricted by the amount of finance available

Question 4

Explain horizontal intergration

Answer 4

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 5

Give pros and cons of horizontal intergration

Answer 5

Pros
Removes a competitor from the market
Opportunity for greater economies of scale
Business gains a greater market

Cons
Hostility and job losses may occur
Changes within the business could impact negatively on customer loyalty
Can be expensive to purchase another company

Question 6

Explain vertical intergration

Answer 6

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

Forward vertical integration – when a business takes over a company at a later stage in the production.

An example of forward vertical integration for Ford Motor Company: Forward vertical integration is when Ford buy out or merge with their customers, which in this case could be a car showroom (e.g. Arnold Clark).

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

Backward vertical integration would be when a company like Ford buy out or merge with their suppliers. Suppliers to a major automobile manufacturer could be car electrics, glassmakers or in this example a rubber plantation which is used to make tyres for the car wheels.

Question 7

Give pros and cons of forward vertical intergration

Answer 7

Pros
Guarantees an outlet to sell products
Cuts out the middle man leading to increased profits
More control over pricing and product display

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

Question 8

Give pros and cons of backward vertical intergration

Answer 8

Pros
Guarantees the quality of inputs and the supply of stock
Cuts out the middle man leading to increased profits
More limit supplies to competitors

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

Question 9

Explain Diversification

Answer 9

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

Question 10

Explain conglomerate intergration

Answer 10

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)

Question 11

Explain lateral intergration

Answer 11

When a business moves into a different market but within a related industry for example a hairdresser merging with a beauty therapist

Question 12

Give pros and cons of lateral intergration

Answer 12

Pros
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

Cons
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 13

How can a business achieve growth

Answer 13

Merger
Takeover
Acquisition
Franchising
Becoming a multinational
Product development
Advertising
Increasing staff

Question 14

Explain the methods of growth - Merger, Takeover and Acquisition

Answer 14

Merger
A merger is when two companies decide to join together, like when Halifax and Bank of Scotland combined to form HBOS.

Takeover
A takeover is more hostile than a merger. This is when a company (usually a larger one) buys out a rival. Kraft Foods bought out Cadbury in early 2010 for £12 billion.

Acquisition
An acquisition is when one company buys the assets or operations of another company.

Question 15

Explain Franchising

Answer 15

Franchising is where a business leases its idea to franchisees. This allows new branches to open across the country and internationally. Many well-known high street opticians and burger bars are franchises. A franchise is a joint venture between:

A franchisee, who buys the right from a franchisor to copy a business format
A franchisor, who sells the right to use a business idea in a particular location

Question 16

Explain the methods of growth - Product Development, Advertising, Increasing Staff

Answer 16

Product development
Developing new products allows a company to target new markets and expand their product range.

Advertising
Advertising can be used to increase awareness of a company’s products allowing them to grow organically or can be used to inform customers of new products.

Increasing staff
By increasing staff numbers, the productivity of a business will grow and there may be increased levels of customer satisfaction.

Question 17

Name the methods of funding growth

Answer 17

Retained profit
Divestment
Deintegration
Asset stripping
Demerger
Buy-in
Buy-out
Outsourcing

Question 18

Explain Retained Profits

Answer 18

Retained profit
A business can hold back profit each year from its shareholders to reinvest into the business. Retained profit does not need to be paid back and prevents any outside influences becoming involved in the business.

Question 19

Explain Divestment

Answer 19

Divestment
Divestment is when a company sells off an asset to raise finances. In 2003, Stagecoach, the Scottish bus operator, sold off its Coach USA operations in Texas for £18 million.

Divestment allows a company to focus on other more profitable aspects of the business and the capital generated from the divestment can be reinvested in the core areas of the business.

Question 20

Explain Deintergration

Answer 20

Deintegration
Deintegration involves selling off a part of the company that had previously been integrated. For example, a company may decide to sell the delivery company they had previously bought to aid with product delivery. This will allow them to focus on the core activities of the business.

Question 21

Explain Asset Striping

Answer 21

Asset stripping
When a company is purchased for the value of its assets rather than for the value of its operations. Asset stripping will involve a business buying another company and then selling off its assets for profit

Question 21

Explain Asset Striping

Answer 21

Asset stripping
When a company is purchased for the value of its assets rather than for the value of its operations. Asset stripping will involve a business buying another company and then selling off its assets for profit

Question 22

Explain Demerger

Answer 22

Demerger
A demerger occurs when a firm divides or breaks into more than one company. In 2010, the UK communications firm Cable & Wireless demerged into Cable & Wireless Worldwide plc and Cable & Wireless Communications plc, the new name for Cable & Wireless International. The divided companies were still owned by the organisation but managed as separate companies (although since then both companies have been bought over).

Question 23

Explain Buy-in and Buy-out

Answer 23

Buy-in
This is when managers who are not employed by the company purchase the business as they believe they can run it more profitably.

Buy-out
This is when managers or employees who are currently employed by the business purchase the business from the owners.

Question 24

Explain Outsourcing

Answer 24

Outsourcing
Outsourcing is when a company hires another business to do some work for them. Many firms outsource cleaning or IT operations to smaller, more specialist companies.