Business growth
Why some businesses grow?
Benefits
o
The possibility of
higher profits for the owners.
o
More status and
prestige for the mangers and the owners – high salaries are often paid for
managers and owners who are in a bigger firm.
o
Can achieve
economies of scale.
o
Growth of a
business often means that it controls a larger market share of its market- can
dominate the market.
o
Protection from
the risk of takeover- the larger the business, the more difficult and expensive
it is for this to happen because a greater number of shares must be bought.
Drawbacks
o
Diseconomies of
scale.
o
Cultural clash due
to takeover- differences in objectives and difference in management style may
fail the business.
o
Integration of
firms may lead to lose control of the business for the original owner.
o
Loss of jobs due
to merger and takeover could damage reputation.
Types of growth
Internal growth:
when a business expands its existing operations.
For example, a shop owner
could open a new shop in another island.
There are many ways of
internal growth:
-
producing more
output using larger machineries.
-
introducing new
products.
-
opening new branches.
-
selling to new
markets.
External growth:
When a business takeover or merges with another business.
Types of external growth
· Merger –
it is when owners of two businesses agree to join their firms together to make
one business.
· Takeover –
it is when one business buys another business, which then becomes part of the
‘predator” business.
Mergers or integration
Horizontal mergers
It is when one firm
merges with or takeover another firm in the same industry at the same stage of
production.
Example- a chocolate
manufacture merges with another chocolate manufacture.
Vertical mergers
It is when one firm
mergers with or takeover another firm in the same industry but in different
stage of production.
-
Vertical forward
integration: it is when a firm integrates with another firm, which is at later
stage of production, closer to consumer. Example – a chocolate manufacture
merges with a chocolate retail shop.
-
Vertical backward
Integration: it is when a firm integrates with another firm at an earlier stage
of production, closer to the raw material supply. Example – a chocolate
manufacture merges with a cocoa firm.
Conglomerate
It is when one firm
mergers with or takeover a firm in a completely different industry. It is also
known as diversification.
Example – a business
making chocolate merges with a business in construction industry.
Advantages of integration
Horizontal integration
o
It Reduces the
number of competitors in the industry.
o
Opportunities
economies of scale.
o
Combined business
will have a bigger share of the total market.
Forward vertical
integration
o Can
guarantee outlet for their product.
o
Can prevent from
selling competitors’ products.
o
It will help to
obtain information about needs and preference of the consumer directly by the manufacture.
Backward vertical integration
o
Can guarantee supply
of important components.
o
Can prevent from
supplying other manufacturers.
o
Can control costs
of components and supplies for the manufacturer.
Conglomerate
o
Help to spread the
risks of the business.
o Transfer of ideas between the sections of the business.
Quiz
Worksheet
Do this worksheet in a paper and email me if you want to mark it
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