Business Growth
Business Growth
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Business Growth
There are two main types of growth
- internal/organic growth
- external/integration growth
Organic Growth
Organic growth is where the firm grows by increasing their output. For example, increased capital investment or more labour. It may involve opening new stores or increasing their range of products.
Example of a firm who grew through organic growth is Lego. They even introduced new products such as lego friends and board games to expand their customer base
Advantages of Organic Growth
- Cheaper than other growth
- Sustainable growth rate
- Able to keep control over business
Disadvantages of Organic Growth
- Slow growth
- Time cosnuming
- High risk
- Unable to gain asses externally by buying a company eg. expand in asia by buying asian company
- Difficult to get new ideas
External Growth
External growth occurs through a merger or takeover. A merger is where two or more firms join under common ownership and an acquisition which is where a firm takes over another firm
Examples of a Merger:
Orange and T mobile merged
EE, heinz and kraft foods merged – kraft heinz company
Examples of an Acquisition:
Nestle, Unileaver, Procter and Gamble
A takeover is when one firm buys another
Eg – disney bought 21st century fox
Vertical Integration
- The integration of firms in the same industry but at different stages in the production process.
- If the merger takes the firm back towards the supplier of a good, it is backwards vertical integration
- When the firm is moving towards the eventual consumer of a good it is forwards vertical integration
- Forward vertical integration occurs when a firm integrates with another firm in the next stage of the production process closer to the final consumer
- Backward vertical integration occurs when a firm merges with another firm in the previous stage of the production process closer to the raw materials
- Production – Brewing of beer.
- Distribution – beer transported to local markets.
- Retail – Beer sold in pubs and shops.
Advantages of Vertical Integration
Backward:
- Increase in potential profit – no markup to pay – more control over prices
- Less risks as businesses can control quality of supplies and ensure delivery is reliable
- Keep costs low – more competitive
Forward:
- Secures retail outlets and can restrict access to these outlets for competitors
- Consumer does not get distracted by competition from other firms
- Firm is able to update their products / services to keep in line with consumer demands
Disadvantages of Vertical Integration
Backward:
- Firms may have no expertise in the industry they look to take over
- It may not be necessary for firms to buy all supplies
- Firm may not be able to respond effectively to changes in consumer demands
Forward:
- Firm may lack marketing and sales expertise
- May be a lack of variety in the products / services offered to consumers
Examples – netflix, starbucks
Horizontal Integration
- Firms in the same industry at the same stage of production integrate.
- Eg – in 2015 astrazeneca acquired ZS pharma for 2.7 billion – it gave them access to new compounds and was a long term deal intended to strengthen a specific sector of their business.
- Other well known examples are currys and pc world
- Arcader group acquired top shop
Advantages of Horizontal Integration
- Increase market share – reduces competition so market power increases – more influence on the market and less risk of being bought out
- The firm is able to exploit internal economies of scale, especially if the industry is possesses high fixed costs
- By two companies merging, there is an increased opportunity for greater research & development, as well as variety for consumers
Disadvantages of Horizontal Integration
- Cultural conflict on how companies run, causing inefficiencies and diseconomies of scale
- Not diversifying risk
- Some workers may experience a job loss if there are many of the same job roles in the new bigger firm
- The increase in market share may mean consumers face higher prices and possible monopoly power
Conglomerate Integration
- Where firms in different industries with no obvious connections integrate or one buys the other one out
- Eg – virgin – train , airline, cinema
Advantages of Conglomerate Intergration
- reduces risk diversification and the risk of facing a loss
- Useful for firms to conduct in conglomerate integration where they may be no room for growth in the present market as it allows each firm to perform well at different parts of the business cycle
- Easier to expand and gain finance
- Enables brand recognition
- Encourages a new customer base as there are now a variety of different consumers in the market
Disadvantages of Conglomerate Integration
- Firms are going into markets in which they have no expertise, this could create ineffective corporate governance policies and poor pricing strategies
- May take a while for firms to adopt a new corporate culture
Constraints on Business Growth?
- Access to finance – more difficult for smaller and middle-sized firms to borrow
- Owner objectives – owners may tend to employ family workers as it can be easier to manage
- Size of the market – firms may be forced to drop their product prices if they want to increase their output
- Regulation – competition and markets authority monitor competition and make sure it’s in the interest of consumers
- CMA
EDEXCEL B Spec – Additional Content
Problems arising from growth
Diseconomies of Scale
- These occur when average costs start to increase with every extra unit of output
- Internal diseconomies of scale such as: coordination, control and communication
Potential Shortages in skills
- A shortage in skillsets can affect a worker’s productivity, their wages, and the competitiveness of firms
- The demand for labour outweighs the supply of labour – hence there will be higher wages and increase in firms’ costs
Quick Fire Quiz – Knowledge Check
1. Distinguish between ‘External Business Growth’ and ‘Internal Business Growth (4 marks)
2. Discuss the advantages and disadvantages of Organic Growth (8 marks)
3. Explain what is meant by ‘Vertical Integration’, highlighting the difference between Forward and Backward Vertical Integration (6 marks)
4. Identify an example of Vertical Integration (2 marks)
5. Identify and explain the advantages of Vertical Integration (6 marks)
6. Identify and explain the disadvantages of Vertical Integration (6 marks)
7. Explain what is meant by ‘Horizontal Integration’ (2 marks)
8. Identify and example of Horizontal Integration (2 marks)
9. Discuss the advantages and disadvantages of Horizontal Integration (8 marks)
10. Explain what is meant by ‘Conglomerate Integration’ (2 marks)
11. Discuss the advantages and disadvantages of Conglomerate Integration (8 marks)
12. Explain the five constraints of business growth (10 marks)
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