Theme 3

What are the reasons for planned growth?

• To increase profits

• To achieve economies of scale

• Increase market share

• Increase profitability

• Increased market power over customers and suppliers

What are the 2 types of economies of scale?

• Internal - economies within a business such as managerial, purchasing and technical economies

• External - economies that occur in the industry e.g. improved infrastructure

What are some problems linked to growth?

• Diseconomies of scale (average costs rising)

• Overtrading

Why do diseconomies of scale occur?

• Poor communication

• Poor employee motivation (alienation)

• Poor management 

Organic growth

When a firm grows from within, using its own resources

Inorganic growth

When a firm grows from merging or acquiring another company

Advantages for organic growth

• More control

• Minimises risk

• Gives staff opportunities to advance = better motivation

Disadvantages for organic growth

• Slow growth

• Limited by internal resources

• Harder to respond to competition

What is a merger?

When 2 firms of a similar size agree to join forces permanently creating a new company

What is a takeover?

One firm buys the majority of shares in another

What is vertical integration?

When one firm takes over/merges with another in a stage of production in the same industry

What is horizontal integration?

When a firm buys out another in the same industry (e.g. a competitor)

What is conglomerate integration?

When one firm buys out another with no clear connection to industry

Why do businesses remain to stay small?

• Product differentiation or USPs

• Flexibility

• Maintain customer service level

Forward vertical integration

Buying out a customer

Backward vertical integration

Buying out a supplier