3.1.2 Business growth

What are the two main types of growth?

2 main types of growth=

• internal/organic growth

• integration

What is organic growth?

Organic growth is where the firm grows by increasing their output , for example increased investment or more labour. They may open new stores, increase their range of products etc. Almost all growth of firms is organic.

What is an example of a firm who grew through organic growth?

An example of a firm who grew through organic growth is LEGO. They introduced new products, such as Lego Friends and board games to expand their customer base.

What is integration?

Integration is growth through amalgamation/ merger or takeover.

What is a merger?

A merger (or amalgamation) is where 2 or more firms join under common ownership.

What is a takeover?

A takeover is when one firm buys another.

What are the 2 types of vertical integration?

2 types of vertical integration=

• forward vertical integration

• backward vertical integration

What is vertical integration?

Vertical integration is the integration of firms in the same industry but at different stages in the production process .

What is forward (vertical) integration?

Forward integration is when the firm is moving towards the eventual consumer of a good.

What is backward (vertical) integration?

If the merger takes the firm back towards the supplier of a good, it is backwards integration

What is an example of vertical integration?

Tesco’s £3.7bn takeover of Booker in 2018 is an example of vertical integration. It has led to an increase in sales for Tesco.

What is horizontal integration?

Horizontal integration is where firms in the same industry at the same stage of production integrate.

What is an example of horizontal integration?

Currys and PC Worlds and Arcadia, who own Topshop, Evans, Dorothy Perkins etc.

What is conglomerate integration?

Conglomerate (lateral) information= where firms in different industries with no obvious connections integrate. They can sometimes be linked by common raw materials/technology/outlets.

What is an example of conglomerate integration?

Today, this is uncommon, but it was popular in the 1960s and 1970s. General Electric was founded as a lighting business and is now involved in aircraft, water, oil and gas, financial services, healthcare, energy, aviation, rail and software. It is a successful model because they conduct extensive market research and remain as market leaders in relevant industries

What are the advantages of organic growth?

Advantages of organic growth=

• Integration is expensive, time-consuming and high risk , with evidence suggesting that the long-term share price of the company falls following integration. Firms often pay too much for takeovers and integration is often poorly managed with many key workers tending to leave after the change.

• The firm is able to keep control over their business.

What are the disadvanatges of organic growth?

Disadvantages of organic growth=

• Sometimes another firm has a market or an asset which the company would be unable to gain through organic growth. For example, integration would allow a European company to expand into the Asian market which it has no expertise in.

• Organic growth may be too slow for directors who wish to maximise their salaries.

• It will be more difficult for firms to get new ideas.

What are the advantages of forward and backward vertical integration?

Advantages of forward and backward vertical integration=

• There is increased potential for profit as the firm takes the potential profit from a larger part of the chain of production.

• There will be less risks as suppliers do not have to worry about buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods.

• With backward integration, businesses can control the quality of supplies and ensure delivery is reliable . Moreover, they don’t have to worry about being charged high prices for supplies, keeping costs low and allowing lower prices for consumers. This can increase competitiveness and sales.

• Forward integration secures retail outlets and can restrict access to these outlets for competitors.

What are the disadvantages of forward and backward vertical integration?

Disadvantages of forward and backward vertical integration=

• Firms may have no expertise in the industry they took over, for example a car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa.

What are the advantages of horizontal integration?

Advantages of horizontal integration=

• This helps to reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets.

• Firms will be able to specialise and rationalise , reducing the areas of the businesses which are duplicated.

• The business is able to grow in a market where it already has expertise , which is more likely to make the merger successful.

What are the disadvantages of horizontal integration?

Disadvantages of horizontal integration=

• The problem is that it will increase risk for the business as if that particular market fails, they have nothing to fall back on and will have invested a lot of money into that area. They are ‘placing all their eggs in one basket’.

What are the advantages of conglomerate integration?

Advantages of conglomerate integration=

• It is useful for firms where there may be no room for growth in the present market.

• The range of products reduces the risk for firms and if a whole industry fails, they will still survive due to the other parts of the business.

• It will make it easier for each individual part of the business to expand than if they were on their own as finance can be easily obtained and managers can be transferred from company to company within the firm.

What are the disadvantages of conglomerate integration?

Disadvantages of conglomerate integration=

• The problem with this is that firms are going into markets in which they have no expertise. It can often be damaging for the business.

What are the constraints of business growth?

Constraints of business growth=

• size of the market

• access to finance

• owner objectives

• regulation

Why is the size of the market a constraint of business growth?

Size of the market is a constraint of business growth=

A market is limited to a certain size and so not all businesses are able to mass produce because their goods would not be bought by consumers. This can happen no matter how big the market is, and there will always be limits on growth. In particular, niche markets (specific products that few people want) and markets for luxury items or restricted prestige markets make it difficult for businesses to grow.

Why is access to finance a constraint of business growth?

Access to finance is a constraint of business growth=

Firms use two main ways to finance growth: retained profits and loans. If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow. Banks may be unwilling to lend firms money, particularly smaller businesses that they see as high risk. As a result, firms will be unable to grow as they can’t finance it.

Why are owner objectives a constraint of business growth?

Owner objectives are a constraint of business growth=

Some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with growth.

Why is regulation a constraint of business growth?

Regulation is a constraint of business growth=

In some markets, the government may introduce regulation which prevents businesses from growing.

• For example, the UK government regulates the number of pharmacies in a local area and an existing pharmacy can only expand by buying another company. Competition law, which prevents monopolies, can restrict growth as any merger which creates a company with more than a 25% market share can be forbidden from taking place.