Chapter 3 - Size of Business
Learning Objective: Business Growth (3.3)
There are many reasons why businesses want to grow:
With growth comes higher sales which consequentially leads to more revenue and higher profits.
Growth generally brings a higher market share. Companies with more market share have a higher bargain power to suppliers which can result in lower materials cost. As a consequence, businesses become more profitable.
Led by growth is also the raise of economies of scale. Businesses that sell more usually enjoy of cost advantages leading to higher profits.
Some business owners may want to achieve growth for increased personal power and status in the public sphere leading to them having political influence locally.
Larger businesses significantly reduce the risk of becoming a target of takeovers - you grow to get too big to be eaten by another firm.
Business growth can be either internal (organic) or external - through mergers and takeovers:
Internal Growth (organic growth) happens when a company expands on its own, for example:
By opening new branches and shops;
By expanding production capacity (factories);
By launching new successful products;
By attracting new and more customers.
Organic Growth is usually slow but steady which helps preventing problems of businesses that expand too fast through external growth. For example, when businesses expand too fast they might face troubles with:
Overtrading, a situation when businesses engage in more business activities that it can support (resources) or that the market demands;
Culture Incompatibility.
External Growth (a.k.a. integration):
- A practice where two or more businesses are brought together;
- It is common on very competitive industries where expanding quickly is vital;
- It can lead to serious management problems (culture, ethics, etc.).
Forward vertical, backward vertical, horizontal, and conglomerate are the different types of integration out there.
Examples:
Advantages, disadvantages, and impacts of horizontal integration:
Advantages, disadvantages, and impacts of forward vertical integration:
Advantages, disadvantages, and impacts of backward vertical integration:
Advantages, disadvantages, and impacts of conglomerate:
Exam-Style Questions
Q5, Q6, Q10, Q11
Companies going through integration are commonly looking for increase efficiency and profitability. Integrated businesses enjoy of:
Shared/larger research facilities - more ideas being generated;
Economies of scale which reduces average costs;
Reduced marketing/distribution costs as outlets can be shared;
Rationalization of assets to reduce duplication.
However, such objectives are oftentimes not achieved. The reasons are plenty:
- Lack of synergy between businesses (managers, teams, corporate culture);
- Diseconomies of scale due to size;
- Reduced opportunities for shared R&D and/or outlet facilities (due to different products);
- Rapid growth is difficult to be managed effectively.
Joint-Ventures and Strategic Alliances:
These are further forms of external growth that do not require changes in ownership and keep the businesses that are part of the agreement independent (joint-ventures have been covered before).
- Strategic Alliances are similar to joint-ventures as they keep businesses independent from each other.
- They are time-limited and once their objectives have been reached they are ended;
- Successful alliances bring together businesses with different strengths and benefit all organizations involved.
Pro Tip: If a question refers to a merger or takeover, you should start by identifying what yype it is. Do not forget that merger and takeovers often cause businesses as many problems as they solve.
To-Do List:
Essay Question Q1.b.
Chapter 3 - Size of Business
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