2. Sizes of businesses

Small & medium-sized enterprises

have less than 250 employees, Annual turnover under 50m Euros

Large corporations

have more than 250 employees and annual turnover over 50m Euros

Organic growth

is internal growth of a business to build capabilities and resources rather than through merger and takeover - eg. increasing sales (no purchasing of shares)

• Increasing production capacity through investment

• Develop and launch new products

• Growing customer base

Advantages of organic growth

• Business can easily maintain same work culture/values (than if merged with another firm)

• Less disruptive (to workers etc.)

• Communication amongst workers should remain strong

• Sustainable and controlled expansion

• Relies on internal resources, lower financial risk

Disadvantages of organic growth

• Slower growth compared to other strategies

• Limited in terms of rapid market capture

• Time consuming and requires patience before results seen

Inorganic growth

is external growth through takeovers or mergers (buying another firm's shares)

Merger

is where two separate firms combine to form a single new entity

Takeover

is when one firm purchases enough shares to have a controlling stake in another, absorbing it into the existing company

Why a merger or takeover may fail

• Different business objectives

• Culture clash (work environment)

• Cultural differences (in countries)

• Financial problems 

• Government may prevent monopolies through regulation 

• Lack of synergy (may thing combination may be better together, but not reality)

Joint venture

is where two separate firms create a new separate firm/product

Vertical integration

is where a firm expands its operations by acquiring or controlling other businesses that are either upstream or downstream in supply chain (up or down sectors)

Either backward or forward

Forward vertical integration

is when operations are expanded by controlling businesses closer to end-consumer or distribution (like purchasing a cafe if you are a coffee company)

Backward vertical integration

is when operations are expanded by controlling business closer to producers of supply chain (like buying a farm for a coffee company)

• Integrates different stages of product (like buying a farm)

• Main goal is to control entire value chain from raw material to service delivery 

Benefits of vertical integration 

• Increased market power, more control over distribution channels and access to final customers (providing better bargaining position)

• Enhances control over distribution (how distributed and displayed, better brand representation, consistent messaging and improved customer experience)

• Profitability increased by cutting out distributors, capturing larger portion of value chain, leading to higher profit margins (cheaper raw materials etc) + reduce cost of middlemen

Drawbacks

• Mergers can create new problems of communication and coordination with bigger firms, leading to diseconomies of scale where the bigger firm is more inefficient 

• May lose benefits of specialized expertise

• May raise competition concerns (monopolies)

• May become complacent, rely less on external innovation 

• High upfront costs of acquisition

Horizontal integration

is a merger or takeover between two businesses in the same industry at the same stage of production

• Aims to reduce competition + increase market share (eg. apple buys samsung)

Advantages of horizontal integration 

• Exploit internal economies of scale (lower average costs leads to increased profits)

• Cost savings from rationalization of business (job losses to increase productivity)

• Wider range of products (diversification) creates opportunities for economies of scope

• Reduces competition by removing key rivals, increasing market share and long-run pricing power

• Can be cheaper in long run to buy well-known brand, as entry barriers higher for potential rivals

Drawbacks of horizontal integration

• Reduced flexibility, as addition of more personnel and processes means more legal accountability and paperwork, slowing down rate of business innovation 

• Risk of diseconomies of scale (increase long run average cost) from business if clashes of management style and corporate culture

• Risk of attracting scrutiny from competition authorities (worry merger may decrease competition, leading to higher prices and decline consumer welfare

Conglomerate integration

where a business invests in an unrelated firm - diversification. Good strategy for asset stripping (buy company and sell off assets for profit) but lacks specialization (coffee shop invests in clothing store)

Advantages of conglomerate integration

• Diversification of risk

• Potential for higher returns in diverse markets

Advantages of conglomerate integration

• Diversification of risk

• Potential for higher returns in diverse markets

Disadvantages of conglomerate integration

• Complex to manage unrelated businesses

• Limited synergy between diverse operations

• Hard to achieve economies of scale

Constraints on business growth

• Size of market

• Access to finance

• Owner objectives

• Government regulation and bureaucracy

Size of market constraint of growth

Niche

• if market size is small, there is no point in expanding business as there is a limited amount of consumers

• Demand would remain unaffected even with expansion

Access to finance constraint of growth

Small firms may not be trusted by banks

• Unable to take large loans to finance expansion

Owner objectives constraint of growth

May not be profit driven, could be aimed for social objectives

• Therefore no need to expand

Government regulation and bureaucracy constraint of growth

High levels of paperwork and licenses needed means time consuming to get documents to expand - INTERTIA