1. Methods of Growth

2. Why Grow?
To remove competition from the market place – the larger you are the more stronger your market position will be.
To increase your market share (the amount of consumers available who use your product)
To increase profits (economies of scale allow business to buy stock/materials cheaper)

3. Why Grow?
To enter new markets – the market you operate may have become saturated – you can’t gain any more of the market share.
Ambition of owners
To control prices (stop prices being lowered or increased – can only be done by a large company with high market share)
To improve reputation of the business nationally or globally.

4. TASK Mergers and Takeovers Horizontal Integration
Backwards and Forwards Vertical Integration
Diversification
Merger
Takeover
Deintegration/Demerger
Divestment

5. Realizing the market value of an asset by selling, liquidating, or exchanging it. Opposite of investment.
Sale of all or majority of voting stock (voting shares) of a firm.
According to the report: “In the past two years, dozens of public and private institutions have announced plans to divest their fossil fuel holdings because of environmental concerns, ethical investment strategies, or worries that assets might become “stranded” by emission regulations. However, a much larger-scale divestment from fossil fuels by institutional investors would be far from easy.”

6. Mergers and Takeovers
A merger occurs when two businesses agree to join forces and act as one.
Normally a positive action for the company and customers – more efficient.
But they can lead to downsizing and job losses.

7. Mergers and Takeovers
A take-over, arises from one business buying another business. This is usually under duress and in a predatory manner (hostile).
Usually viewed as bad for the company being taken over and good for the customers.
Usually the cause of job losses and has a negative impact on the company being taken over.

8. Horizontal Integration
Two companies which operate at the same stage of production of a good decide to merge.
Allows them to dominate the market in which they operate as competition is eliminated and market share increased
Become stronger and therefore more resistant to future takeover
More efficient as they acquire the assets of the other firms.
Can achieve greater economies of scale

9. Vertical Integration
Two companies which operate at different stages of production decide to merge into one.
Can be Backward Vertical Integration or
Forward Vertical Integration

10. Backward Vertical Integration
This is when a firm takes over another at an earlier stage of production eg a jam manufacturer taking over a fruit farm
Can be sure of availability of inputs
Can be sure of quality of inputs
Can control price of inputs

11. Forward Vertical Integration
This is when one firm takes over another at a later stage of production eg a pie manufacturer taking over a chain of delis
They can control the selling price
They can control the distribution outlets for the product
Can link processes more easily

12. Diversification
Opportunity to enter new markets and produce different goods
Result of markets changing
Occur through takeover or merger
Allows the firm to grow and develop in other areas
Spreads the risks in case one area of the business fails (don’t have all your eggs in one basket).
Allows you to acquire other assets
Gain new knowledge and experience

13. Example of diversification
Virgin
Aeroplanes
Trains
Personal Investment
Soft Drinks
Alcohol
Music Stores
If any of these markets start to fail, Virgin does not depend on just one product, therefore the whole business will not fail.

14. Demerger: When two companies have previously joined forces decide to part company and operate individually again.
Divestment: involves selling off one or more subsidiary (child) companies originally belonging to the parent company. (Top Shop, Top Man, Dorothy Perkins, Burtons, Wallis etc are all part of the Burtons Group).

15. Management buy out/buy in
Team of managers getting together and buying an existing company from its owner. The management team have to raise the necessary finance to buy out and run the organisation – this may involve large bank loans.
A buy-in is when the team comes from outside the business

16. Contracting out/outsourcing
It pays other firms to do certain duties for them eg transport, cleaning, catering

17. Question
Describe methods of growth. (6) 

18. Answer
Vertical integration is when organisations at different stages of production join together. This can be done in two ways.
Forward vertical is when an organisation takes over or merges with a customer.
Backwards vertical is when an organisation takes over or merges with a supplier.
Horizontal integration is when organisations at the same stage of production join together.

19. Answer
Diversification is when an organisation operates in many different markets eg Virgin. This allows them to spread their risk
Organic growth is when a firm is grown from internal sources eg using retained profits to open more outlets, increase the number of staff it employs or increase the number of products sold
Opening a franchise. By selling the business idea, layout and products whilst still retaining control.

20. Answer
A merger is when two businesses agree to join forces and act as one.
A takeover is when one business buys over another business.
A demerger is when organisations cut back and concentrate on only their core activities
Divestment is when a company sell off assets or subsidiary companies to raise finance for growth.

21. Hints Watch for repetition Max 5 for any one method
If label given – description must match otherwise no marks
Will not accept advantages and disadvantages

22. Question
Explain how different methods of growth can lead to increased sales or profits. (5)

23. Answer
Horizontal integration – firms producing the same products combine together. This allows for greater economies of scale which allows for lower unit costs and increased profits
By becoming larger they should become better known in the market and this should lead to brand loyalty and increased sales
They might dominate the market due to the greater size of the organisation and can then set prices and encourage customers to purchase from them through large promotional activities
By removing competitors they will increase sales

24. Answer
Vertical integration – firms at different stages in the production process combine together. This can cut out middle men and allow the organisation to retain all profits made in the chain themselves
Backward vertical – when a firm combines with a supplier which ensures that there is constant and consistent supplies of raw materials at appropriate prices
Forward vertical – when a firm combines with a customer which ensures that sales are constant and can increase profits

25. Answer
Conglomerate – when a firm combines with another firm in a completely different market. This means that profits can be made from a variety of markets and sales do not rely on just one industry
Divestment – by selling off one of the less profitable child companies expenses can be saved leading to increased profits
Demerger – by operating on an individual basis again the business could retain customers gained from the original merger

26. Question
Discuss the effects of outsourcing on an organisation. (5)

27. Answer Specialists can be used to do the work
Reduces staff costs in the area that has been outsourced
Outsourced companies will have specialist equipment
The service can be provided cheaper – needs development
The service can be more expensive – needs development

28. Answer The service needs only to be paid for when required
Organisations can concentrate on core activities
Organisations can lose control over outsourced work
Sensitive information may need to be passed to the organisation
Communication needs to be very clear or mistakes can arise