3.1.2 +3.1.3: Business growth + Demergers

Organic growth

• Where the firm grows by increasing their output e.g. increased investment or more labour

• they may open new stories, increase their range of products etc.

Advantages of organic growth

• Integration is expensive, time consuming and high risk

• Evidence suggests the long term share price of the company falls post integration

• Firms often pay too much for takeovers and integration is poorly managed with many key workers tending to leave after the change

• The firm is able to keep control oof their business

• Low risk

Disadvantages of organic growth

• Sometimes another firm has a market or asset which the company would be unable to obtain via organic growth e.g. integration allow a European company to expand into the Asian market

• 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

• High pressure on existing resources- can result in efficiencies or reduced productivity

Integration

• Growth through amalgamation, merger or takeover

• A merer or amalgamation is where two or more firms join under common ownership whilst a takeover is when one firm buys another

Forwards and backwards Vertical integration

• Is when integration takes place between firms in the same industry but at different stages in the production process

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

• E.g: Starbucks owning coffee farms, IKEA owning forests etc

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

• E.g: Netflix producing its own shows, Nike opening its own retail stores

Advantage of vertical inegration

• An increased profit potential 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 abut buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods

• With backwards integration, businesses can control the quality of supplies and ensure delivery is reliable

• They also do not have to worry about being charged high prices for supplies which keeps costs low and allows for lower prices for consumers- this can increases competitiveness an sales

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

Disadvantages of vertical integration

• Firms may have no expertise in the industry they took over

• E.g: a car manufacturing company would have little knowledge of selling cars

• Buying/setting up suppliers or distributors is expensive- high business costs

• Loss of flexibility due to firms being tied up to their own suppliers- cannot easily switch to cheaper of higher quality alternatives

• Can suffer from diseconomies of scale if the business becomes to large

Horizontal integration

• Where firms in the same industry at the same stage of production integrate

• E.g: Facebook buying Instagram, Disney buying Fox

Advantages of horizontal integration

• Helps reduce competition as a competitor is removed and increases market share- gives them more power to influence markets

• Firms will be able to specialise and rationalise which reduces the duplicated areas of business

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

Disadvantages of horizontal integration

• 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 in that area- eggs in one basket

• Firms can suffer from diseconomies of scale

• A large amount of job losses from duplicated rolls can tarnish brand image and employee relations

Conglomerate integration

• When firms in different industries integrate

• They can sometimes be linked via common raw materials/technology/outlets

• E.g: Google buying youtube, Virgin group operating in airlines, trains

Advantages of conglomerate integration

• 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 survive due to other parts of the business

Disadvantages of conglomerate integration

• Firms are entering markets they have no expertise in- can be damaging for the business

• Over diversification can reduce overall performance

Constraints of business growth: Size of the market

• A market is limited to a certain size meaning not all firms are able to mass produce because their goods would not be bought by consmers

• Can occur no matter the size of the market, and there will always be limits on growth especially in niche markets

Constraints of business growth: Access to finance

• Firms use retained profits and loans to finance growth

• If firms do not make enough profit or have to give out too much too shareholders, they will not be able to use retained profits to grow

• Banks may be unwilling to lend firms money- especially smaller businesses that they see as high risk

• As a result, firms will be unable to finance it

Constraints of business growth: Owner objectives

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

Constraints of business growth: Regulation

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

• E.g: The UK government regulates the amount of [pharmacies n a local area, and an existing pharmacy can only expand by buying another company

Demergers

• A business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be dissolved

Reasons for demergers: Lack of synergies

• This is when the different parts of the company have no real impact on each other and fail to make each other more efficient

• Lack of synergy means managers are splitting their time between areas which are so different it could result in diseconomies of sclae

• Firms may split to avoid these diseconomies

Reasons for demergers: Value of the company/share price

• Some companies demerge because the value of the separate pars of the company is worth more than the company combined

• This is because some parts of the business are operating well and have potential to grow buy the overall value is brought down due to the lack of success or potential for growth of other parts of the business

• Financial markets talk about ‘creating value’ by slitting up companies like thus

Reasons for demergers: Focussed companies

• Some people believe if the company and the management are more focussed on individual markets they become more efficient and successful and make higher profits

• Management have limited time and skills and they are unable to spend the required time to make all areas of a huge diverse business successful

• By focusing on one area, managers can improve their skills and knowledge and become more successful

• They may also want to avoid attention form the competition authorities

Impacts of demerger: Workers

• Could gain or lose through a demerger

• Separate firms may need their on managers and leaders so people could get a promotion

• The goal of making the firm more efficient could also result in job losses

Impacts of demergers: Businesses

• Concentrating on a smaller core business may enable it to be more efficient and concentration ma lead to more innovation and surviving higher competition

• However, the smaller size of the business could lead to a loss of economies of scale ad therefore reducing efficiency

Impacts of demergers: Consumers

• Consumers can gain or lose

• They may gain from innovation and efficiency which results in better products and cheaper prices

• However, demerged firms may be less efficient due to the los of economies of scale

• As a result, they may raise prices or reduce their quality and/or range of goods as they become motivated by profits