2 types of business growth
Internal/organic
Integration
Organic growth
Firms grow by investing in itself and therefore increasing output
Eg more investment more labour
LEGO
Advantages of organic growth
• integration is expensive, time consuming and high risk
• firm can keep control over their business
Disadvantages of organic growth
• sometimes another firm has an asset or market which the company can’t gain through organic growth
• may be too slow for directors who wish to maximise salaries
•more difficult for new ideas
Integration
Growth through amalgamation, merger or takeover
Advantages of vertical integration
• increased potential for profit
• less risks
• backward integration can control quality of supply and ensure delivery is reliable
•secures retail outlets
Why do some firms grow and some stay small?
-sales and profit/ lack of finance
-increase market power/regulations
-diversify and enjoy risk bearing economies/ niche markets(personalised/small)
-internal economies of scale/dis
-owners objectives/profit satisfice
6 types of economies of scale (Richard’s Mum Flies Past The Moon)
-risk-bearing, managerial, financial, purchasing, technical, marketing
diseconomies of scale (ABC)
-alienation
-bureaucracy
-communication
Divorce of ownership and control
(principal agent problem)
principal=shareholders
agent=manager
when the managers of a firm are different to the owners
4 types of firms
public/ private sector
profit/not for profit
eg charities
inorganic growth
grows by merging or acquiring with another firm
4 types of inorganic growth
-horizontal integration
-forwards vertical integration (closer to consumers)
-backwards vertical integration
-conglomerate integration (unrelated industries)
pros and cons of organic growth
pros: keep ownership and control, low risk (have specialist knowledge)
-cons: lose ownership and control (sell shares, franchises), slower growth
pros and cons of vertical integration
pros: control of supply chain(prevent competition), reduce intermediary costs (transport), better access (better quality and communication)
cons: regulation (banned if reduces competition and hurts consumers), diseconomies of scale and acquisitions, may lack expertise
pros of cons of horizontal integration
pros: internal economies of scale, rationalisation, reduced competition
cons: internal diseconomies of scale, job losses, brand dilution
pros and cons of conglomerate integration
pros: internal economies of scale (especially risk bearing), increased brand awareness, knowledge transfers (increase dynamic efficiency)
cons: internal diseconomies of scale, brand dilution, lack of expertise
4 benefits of demergers
-reduce size of firm which reduces diseconomies of scale
-both firms can specialise
-sell assets
-culture differences doesnt occur
pro and con of demergers to WORKERS
reduce cultural conflicts
lower job security
pros and cons of demergers to CONSUMERS
lower prices and increased quality
reduces economies of scale
trade unions
group of workers who collectively bargain to improve employee welfare
example of structural unemployment
occupational immobility
