Unit 1 KA4- Methods of Growth Flashcards
Explain the benefits of growth to a business
Have more influence over market
You are big enough to be price setters
Often enjoy economies of scale
Explain organic/internal growth
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
Give pros and cons of organic/internal growth
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
Explain horizontal intergration
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.
Give pros and cons of horizontal intergration
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
Explain vertical intergration
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.
Give pros and cons of forward vertical intergration
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
Give pros and cons of backward vertical intergration
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
Explain Diversification
Diversification is when firms move into new markets that are different from their core business.
Explain conglomerate intergration
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)
Explain lateral intergration
When a business moves into a different market but within a related industry for example a hairdresser merging with a beauty therapist
Give pros and cons of lateral intergration
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
How can a business achieve growth
Merger
Takeover
Acquisition
Franchising
Becoming a multinational
Product development
Advertising
Increasing staff
Explain the methods of growth - Merger, Takeover and Acquisition
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.
Explain Franchising
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
Explain the methods of growth - Product Development, Advertising, Increasing Staff
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.
Name the methods of funding growth
Retained profit
Divestment
Deintegration
Asset stripping
Demerger
Buy-in
Buy-out
Outsourcing
Explain Retained Profits
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.
Explain Divestment
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.
Explain Deintergration
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.
Explain Asset Striping
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
Explain Asset Striping
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
Explain Demerger
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).
Explain Buy-in and Buy-out
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.
Explain Outsourcing
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.
