Flashcards in Understanding Business- Growth Deck (23)
Why would a business want to grow?
If the business grows it has greater control of its market, it is able to compete better with other firms and it can reach more customers, it is more able to resist takeovers and has a better chance of survival
How can organic/ internal growth be achieved?
Opening new outlets
Operating in more markets/ countries
Introducing new products (diversifying)
Benefits of organic growth?
Can be less risky than taking over another business
Can be financed through internal sources
Can build on existing strengths such as brands and good customer relations
Drawbacks of organic growth?
A slower method of growth
Limited by the size of the existing market
How can external growth be achieved?
By buying or taking over another business or by merging with another business
What is backward vertical integration?
When a business takes over a supplier
What are the benefits of backward vertical integration?
Allows the business to control its own source of goods/ materials
Adds the suppliers profit to its own
Can ensure the quality and quantity of supplies
Can control supplies to competitors
What is forward vertical integration?
When the business takes over its customer
What are the benefits of forward vertical integration?
Guarantees an outlet for its goods
Can control the marketing mix for its products
Adds the profit of the customer to its own
What is horizontal integration?
When two business' at the same stage in the production process join together. They can be seen as competitors.
It can involve one business completely taking over another business or it may be a joining of the two to create a new business
Benefits of horizontal integration?
Larger, more financially secure
Gets the profits of the other business
Increases its customer base
Greater marker presence
Drawbacks of horizontal integration?
Requires allocation of financial and HR resources
Risk of harming main business
Takes time to merge the 2 business systems
What is diversification?
When a business moves into a new market by itself, or by taking over and merging with a business already in the new market
What does a business achieve by diversifying?
It reduces the risk of business failure
It increases its profit share
Customers in the new market can be attracted to the existing products
It can be seen as a more successful business
What is outsourcing?
Where part of the operations of the organisation is passed or 'outsourced' to a specialist who may be able to do the job better than the organisation itself
What are the advantages of outsourcing?
It reduces staff and other costs in the area that has been outsourced
Outsourced companies will have specialist equipment
The service need only be payed for when required
Organisations can concentrate on core activities
What are the disadvantages of outsourcing?
Organisations can lose control over outsourced work
Communications need to be very clear or mistakes could arise
The service can be more expensive as the specialist supplier will add their own profit to the price charged
What is asset stripping?
If the business is bought over by another firm and the assets are sold off the fund the purchase and increase wealth of the buyers.
Happens when the value of the shares is lower than the value of its assets
What is a buy in?
When an outside management company buys the business as they believe they can manage it more successfully.
Commonly seen when the existing business is struggling to achieve success in the market
What is buy out?
When an interested party buys or takes over control of the firm. May be the existing management when they think the owners vision will not lead to success.
Could also be an employee buy out, where employees get together to fund the existing business
What is a demerger/ deinvestment?
When organisations sell off unwanted subsidiary businesses/ divisions
Why would a business demerge?
To raise capital for new projects
Increase efficiency of operations
Remove underperforming parts of the business
Remove themselves from negative publicity