3.1.2 Business Growth

• Organic Growth


  Growing a firm internally by relying on its resources eg. retained profits
• Methods of Organic Growth


  -Developing new product ranges

  -Launching into international markets

  -Opening new locations

  -Investing in additional capacity or technology

  -Franchising
• Benefits of Organic Growth


  -Less risky

  -Builds on a firm's strengths

  -Allows the firm to grow sustainably
• Limitations of Organic Growth


  -Growth may depend on the market

  -Hard to build market share as a leader

  -Slow growth may displease shareholders

  -Franchises can be hard to manage
• Mergers


  The fusion of two firms with a similar market share
• Horizontal Integration


  When two firms in the same industry and same stage of production merge
• Forward Vertical


  Acquiring a firm in a forward stage of production in the same industry
• Backwards Vertical


  Acquiring a firm in a prior stage of production in the same industry
• Conglomerate


  A merger between firms in different industries
• Benefits of Horizontal Integration


  -Internal economies of scale eg. bulk-buying, technical and financial

  -Savings from rationalisation, but heavy job losses

  -Revenue synergies from diversification/ economies of scope

  -Reduced competition increases market share and pricing power

  -Buying an existing brand may be cheaper and make barriers for entry higher
• Limitations of Horizontal Integration

  -Risk of diseconomies of scale if there is a clash of culture and management

  -Reduced flexibility due to increased transparency which slows innovation

  -Mergers destroy shareholder value if the synergies do not materialise

  -Attract investigation by the Competition and Markets Authority which may block a merger or ask a firm to dispose of its subsidiaries
• Benefits of Vertical Integration


  -Control of the supply chain lowers unit costs and improves the quality of inputs

  -Improved access to raw materials and charge competitors more

  -More control over retail distribution to increase revenue

  -Decreases competition by removing suppliers and taking market intelligence to increase their power
• Limitations of Vertical Integration


  -Vertical mergers have less economies of scale as they are at different stages of production

  -Can create communication and coordination issues which can lead to inefficiency hence diseconomies of scale
• Benefits of Conglomerate Integration


  -Diversifying across industries helps to spread risk and protect the firm from downturns in an industry

  -Increases revenue by expanding market size and share and tapping into new industries

  -Economies of scale as resources are shared which lowers costs

  -Cross-selling opportunities to leverage the existing customer base

  -Flexibility to market changes so can focus on more profitable industries
• Limitation of Conglomerate Integration

  -Finance required

  -Lack of expertise in unfamiliar markets

  -Diseconomies of scale due to communication and coordination