Chapter 3 - Size of Business
Learning Objective: To understand how businesses grow
Last lesson we learned why some businesses grow and others do not...
We also learned the reasons businesses might choose to grow...
And finally, we learned why governments support business growth...
On this session we will explore two main methods of business growth:
Internal Growth
External Growth
Internal Growth (e.g. 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, on the other hand, happens through mergers, acquisitions, and takeovers. This process can happen within the same industry or with companies in different industries - it's called integration:
Horizontal Integration;
Forward Vertical Integration;
Backward Vertical Integration;
Conglomerate Integration.
Let's look at the first three:
Horizontal Integration is when two firms in the same industry and the same sector of business activity come together (e.g. two banks, two chocolate manufacturers, or two cocoa producers);
Forward Vertical Integration brings together two firms in the same industry, but one is a customer of the other (e.g. a car manufacturer taking over a car garage);
Backward Vertical Integration: brings together two firms in the same industry, but one is a supplier to the other (e.g. a car garage taking over a car manufacturer).
In 2021 Google acquired Motorola for $12.5 billion - forward or backward vertical integration?
In 2019 IKEA bought 83,000-acres of log producers (forests) in Romania for €100 thousand - backward or forward vertical integration?
Finally, let's look at what is Conglomerate Integration:
It happens when two businesses in completely different industries come together:
Amazon acquired Whole Foods for $13 billion in 2017.
Considerations on Growth:
Internal Growth is slow but steady - risk of other businesses using External Growth growing faster and becoming more successful;
External Growth is fast but carries many other risks: decrease workers motivation, businesses can become too big to manage well, culture clash, loss of control.
It is not uncommon for businesses to fail:
And there are numerous reasons for businesses to fail (p. 40):
To-Do-List:
Test Yourself (p. 40)
Chapter 3 - Size of Business
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