Methods Of Growth (Subtopic 2.1.2)

Organic Growth

When a business grows internally (Revenue invested as expansion or with a loan)

And by funding markets

Advantages of Organic Growth

1. Organic growth is less risky than attempting to integrate with another firm

2. Growth can be done by own wealth rather than loans

3. Firms have control over their business and is easier to manage, as merged firms have less control

4. Preserves existing management styles and company values

Disadvantages of Organic growth

1. Slow growth

2. Growth is heavily depend of overall growth of specific market

3. Missed opportunities, external opportunities could promote growth faster

Inorganic Growth

When 2 firms join together (merge) or one firm take over the other.

Advantages of Inorganic Growth

1. Faster access to markets

2. Faster Economies of scale

3. Immediate access to existing technologies and staffs

   
   

Disadvantages of Inorganic Growth

1. Risk of management conflicts

2. Diseconomies of scale, business growing too large and complex to manage, and miscommunication

3. Risk of inheriting the firms large debt or bad reputation (which would make you less reliable and have less buying power)

Horizontal integration

Taking one or merging with a firm at same stage of production in the same industry.

Advantages of horizontal integration

1. Removes a direct competitor

2. 2 workforces in same field means learning from each others methods and experiences, which can boost efficiency

3. Firms stay within specific production change, so they are more responsive to changes

Disadvantages of horizontal integration

1. High risk of business culture clashes

2. Less authority over integrated work forces, which can cause conflict and communication issues (reducing efficiency)

3. More work forces means more wages to pay to employees lowering revenue and profit margins

Vertical integration

Merging with or taking over a firm at a different stage of the same production industry

Backward vertical, retailer buying a manufacturer

Forward vertical, manufacturer buying a retailer

Advantages of Vertical integration

1. Secures control over supply chain and controls quality

2. Economies of scale, as businesses can save money from buying material resources, this will cut cost then they grow larger.

3. Information gained from different stage of production can be useful to a another stage of production

   
   

Disadvantages of vertical integration

1. Requires management in a completely different industry section

2. Other stages of production could require skills that a firm may not possess

3. Loss of competition as supplier has guaranteed buyer, which encourages complacency and slacking, lowering efficiency and quality

Conglomerate integration

When a business merges or takes over a firm with zero in a completely different industry

Conglomerate integration advantages

1. By expanding into other markets, a conglomerate can spread and reduce risk, if one market, they won’t face threat of closure, as the other market could be successful

Conglomerate integration disadvantages

1. Spreading across markets can cause drains and reallocate resources from a successful business

2. Shareholders might be inexperienced and have no knowledge over a completely new market

3. Can cause diseconomies of scale, as managing different markets can be difficult