3.1 Business Growth

Organic growth

Expansion using the firm’s own resources: increasing output, opening new branches, entering new markets. 

Vertical integration

Merging with or acquiring another firm at a different stage of the production process (supplier, distributor, manufacturer). 

Horizontal integration

Merging with a firm at the same stage of production in the same industry. 

Conglomerate integration

Merging with a firm in an unrelated industry.

Reasons for small firms

They operate in niche markets where large-scale production is unnecessary and where market demand may be too small to support larger firms.

Reasons why firms grow

Economies of scale and opportunistic behaviour such as marketing.

The Principal-Agent problem

When owners (principals) and managers (agents) have different objectives, and managers make decisions that do not align with what the owners want, because owners cannot fully monitor them.

Public sector firms

Government-owned and aims include welfare and service provision. 

Private sector firms

Privately owned and aims primarily at profit.

Profit organisations

Organisations which aim to maximise profit for owners/shareholders. 

Advantages of organic growth

Lower risk, maintains firm culture, can use retained profits. 

Not-for-profit organisations

Organisations which aim for social objectives so any surplus is reinvested.

Disadvantages of organic growth

Slower growth, may miss market opportunities. 

Advantages of vertical integration

Greater control of supply chain, reduced uncertainty, possible cost savings. 

Disadvantages of vertical integrations

Risk of inefficiency, management difficulties, high cost of integration. 

Advantages of horizontal integration

Economies of scale, increased market share, reduced competition. 

Disadvantages of horizontal integration

Risk of regulatory action, integration problems, reduced consumer choice. 

Advantages of conglomerate integration

Diversifies risk, stabilises profit, enters new markets. 

Disadvantages of conglomerate integration

Lack of expertise, managerial diseconomies, reduced focus on core business. 

Demerger

When a firm splits into two or more separate businesses so each part can operate more efficiently and focus on its core activities.

Reasons to demerge

To improve efficiency. Parts of the business may be underperforming. Some parts may be attractive to sell. May reduce diseconomies of scale. 

Demerger impact on businesses

Greater focus on core operations can improve performance. Newly separated businesses may become more efficient and profitable. Loss of economies of scale may increase costs.

Demerger impact on workers

Possible job losses due to restructuring. Better career opportunities in more specialised, focused firms. Changes in working culture and management structure.

Demerger impact on consumers

More competition can lead to lower prices and better quality. Firms may innovate more when separated. Short-term disruption may occur during restructuring.