Types of Business Growth (Cambridge International IGCSE Business)
Reasons for Business Growth
Spec point — "• Why the owners of a business may want to expand the business • Different ways in which businesses can grow, e.g. internal/external"
Reasons for business growth
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Many firms start small & will grow into large companies or even multi-national corporations
- E.g. Amazon and Dell both started in entrepreneurs' garages
Reasons why businesses grow
| - The owner's or manager's desire to run a large business & continually seek to grow it | - The owner's desire for higher levels of market share and profitability | - The desire for stronger market power (monopoly) over its customers and suppliers |
|---|---|---|
| - The desire to reduce costs by benefiting from lower unit costs as output increases | - Growth provides opportunities for product diversification | - Larger firms often have easier access to finance |
Methods of Business Growth
Spec point — Different ways in which businesses can grow, e.g. internal/external
- Business growth can be achieved by growing organically, or inorganically (mergers and takeovers)
1. Organic (internal) growth
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Organic growth is growth that is driven by internal expansion using reinvested profits or loans
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It is usually achieved by:
- Gaining a greater market share
- Product diversification
- Opening new outlets
- International expansion (new markets)
- Investing in new technology/production machinery
Examples of organic growth
| Business | Explanation |
|---|---|
| Apple | - International expansion (new markets): Apple expanded into new markets by opening its stores in new countries, such as China and India, and by partnering with telecom providers to sell its products. - This helped them to organically increase their market share, sales revenue and profitability |
| - Product innovation: Google introduced new products, such as Google Drive and Google Maps, to complement its search engine and advertising businesses - This helped them to organically increase their market penetration, sales revenue and profitability | |
| Disney | - Product diversification: Disney has diversified into several areas, such as theme parks, cruise lines, television networks, and movie studios. - The brand strength has helped them organically increase market penetration in each of these markets, resulting in higher sales revenue and profitability |
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Product diversification opens up new revenue streams for a business
- Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream
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Firms will often grow organically to the point where they are in a financial position to integrate(merge or buy) with others
- Integration speeds up growth but also creates new challenges
Evaluating internal growth
| Advantages | Disadvantages |
|---|---|
| - The pace of growth is manageable - Less risky as growth is financed by profits and there is existing business expertise in the industry - The management knows & understands every part of the business | - The pace of growth can be slow and frustrating - Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to - Access to finance may be limited |
2. Inorganic (external) growth
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Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others
- Integration in the form of mergers or takeovers results in rapid business growth and is referred to as external or inorganic growth
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A merger occurs when two or more companies combine to form a new company
- The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
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A takeover occurs when one company purchases another company, often against its will
- The acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations
Vertical integration
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Vertical integration refers to the merger or takeover of another firm in the supply chain or different stage of the production process
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Forward vertical integration involves a merger with or takeover of a firm further forward in the supply chain
- E.g. A dairy farmer merges with an ice cream manufacturer
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Backward vertical integration involves a merger with or takeover of a firm further backwards in the supply chain
- E.g. An ice cream retailer takes over an ice cream manufacturer
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A firm can grow through forward or backward vertical integration, merging with or taking over another business in the supply chain
Horizontal integration
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Horizontal integration is the merger or takeover of a firm at the same stage of the production process
- E.g. An ice cream manufacturer merges with another ice cream manufacturer
Evaluating external growth
| Type of growth | Advantages | Disadvantages |
|---|---|---|
| Vertical integration (Inorganic growth) | - Reduces the cost of production as middle man profits are eliminated - Lower costs make the firm more competitive - Greater control over the supply chain **reduces risk **as access to raw materials is more certain - Quality of raw materials can be controlled - Forward integration adds additional profit as the profits from the next stage of production are assimilated - Forward integration can increase brand visibility | - Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles - There can be a culture clash between the two firms that have merged - Possibly little expertise in running the new firm results in inefficiencies - The price paid for the new firm may take a long time to recoup |
| Horizontal integration (Inorganic growth) | - Rapid increase of market share - Reductions in the cost per unit due to economies of scale - Reduces competition - Existing knowledge of the industry means the merger is more likely to be successful - Firm may gain new** knowledge or expertise** | - Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles - There can be a culture clash between the two firms that have merged |
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