The growth of firms

What is organic growth?

Growing through investing profit or using some loan financiers (investors)

How to organically grow?

Through increasing production capacity, launching new products (diversification), finding new markets, growing abroad, growing consumer base via marketing.

What are positives to organic growth?

Firms maintain control over decision making, profit is retained, less risk as not running alongside another firm.

What are negatives to organic growth?

Fully dependant on profit, growth level is inconsistent and relies on demand of good/service, time delays as growth isn’t linear

What is external growth?

Becoming more integrated by merging with a or taking over another firm

What is a merger?

The voluntary combination of two or more firms into a single larger entity

What is an acquisition/takeover?

The purchase of one company by another resulting in the acquirer gaining all control over the targets assets and operations

What is a recent example of an acquisition?

Nationwide acquired Virgin Money for 2.9 billion pounds in October 2024

Why do firms merge instead of growing organically?

Increased market power (<market share, <profits)

Faster speed of access to new product

Access to economies of scale (EOS)

Secure stable/better distribution channels

Overcoming barriers to entry

What are the disadvantages to merging?

Cultural/management clashes

Costly in the short run

Diseconomies of scale (DOS)

What is backward vertical integration?

Where firms merge/acquire a business a step before in the production line. E.g McDonald’s merging with PepsiCo (who supply carbonated drinks)

What s forward vertical integration?

When a firm merges/ acquires the step after them in production line. E.g. McDonald’s merging with Uber eats

What is horizontal integration?

Merging/acquiring a firm on the same production level as you. E.g. McDonald’s merging with KFC

What is conglomerate growth?

Where a firm merges/acquires a firm outside of their given market. E.g. Virgin with several brands, broadband,airlines, trains

What is a demerger?

Where a firm splits itself into two or more parts to create separate firms

What are reasons for demergers?

Lack of synergy - one firm having no impact on more efficient side

Price - Price of demerged firms may be higher than when firms have merged

Focused companies- conglomerates were once trending, now fashionable to be in focused market, as management can deliver higher profits

What is the impact of demergers on businesses?

Will benefit if it leads to greater efficiency. Enable better survival against competition and rise in profits. If run less well, fall in profits

What are the impact of demergers on workers?

Senior managers may gain promotion as second firm will need managers. Some workers may lose jobs as work becomes more efficient

What is the impact of demergers on customers?

Will gain if firm becomes more efficient, as they may cut costs and lower prices, or invest. Will lose if firms become focused on increased profit through higher prices or reducing production ranges