2.1

• Internal (Organic) Business Growth


  Growth that is driven by internal expansion using reinvested profits or loans
• Reasons why Businesses grow

  • Owners/Shareholders/Managers desire to run a large business & continually seek to grow it
  • Owners/shareholders desire higher levels of market share and profitability
  • The desire for stronger market power (monopoly) over its customers and suppliers
  • Desire to reduce costs by benefitting from lower unit costs as output increases e.g suppliers offer bulk order discounts
  • Growth provides opportunities for product diversification
  • Larger firms often have easier access to finance
• Retrenchment involves a business scaling down its operations as it evolves and can involve Reducing the size of the workforce, Closing less profitable outlets, Exiting existing markets
• Retrenchment can help a business to reduce costs and is particularly relevant for businesses whose objective is to survive
• Organic growth (internal)


  Usually generated by Gaining a greater market share, Product diversification, Opening a new store, International expansion (new markets), Investing in new technology/production machinery
• Examples of Organic Growth

  • Apple - International Expansion (new markets)
  • Google - Product Innovation
  • Disney - Product Diversification
• Product diversification opens up new revenue streams for a business
• Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream
• Firms will often grow organically to the point where they are in a financial position to integrate (merge or buy) with others
• Integration


  Speeds up growth but also creates new challenges
• Advantages of Internal (Organic) Growth

  • The pace of growth is manageable
  • Less risky as growth is financed by profits and there is existing business expertise in the industry
  • The management knows & understands every part of the business
• Disadvantages of Internal (Organic) Growth

  • The pace of growth can be slow and frustrating
  • Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to
  • Access to finance may be limited
• External (Inorganic) Business Growth

  Integration in the form of mergers or takeovers resulting in rapid business growth
• Merger


  Two or more companies combine to form a new company, the original companies cease to exist and their assets and liabilities are transferred to the newly created entity
• Takeover


  One company purchases another company, often against its will, the acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations
• Reasons for mergers and takeovers


  • Strategic fit
  • Lower unit costs
  • Synergies
  • Elimination of competition
  • Shareholder value
• Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others
• Vertical integration


  Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain, Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain
• Advantages of Vertical Integration

  • Reduces the cost of production as middleman profits are eliminated
  • Lower costs make the firm more competitive
  • Greater control over the supply chain
  • Reduces risk as access to raw materials is more certain
  • The quality of raw materials can be controlled
  • Forward integration adds additional profit as the profits from the next stage of production are assimilated
  • Forward integration can increase brand visibility
• Disadvantages of Vertical Integration

  • There may be unnecessary duplication of employee or management roles
  • There can be a culture clash between the two firms that have merged
  • Possibly little expertise in running the new firm results in inefficiencies
  • The price paid for the new firm may take a long time to recoup
• Horizontal Integration


  Merger or takeover with a competitor in the same industry
• Advantages of Horizontal Integration

  • The rapid increase of market share
  • Reductions in the cost per unit due to receiving more beneficial terms for bulk purchases
  • Reduces competition
  • Existing knowledge of the industry means the merger is more likely to be successful
  • The firm may gain new knowledge or expertise