Topic 4 – Methods of Growth

Higher Business Management

1

Learning Intentions / Success Criteria

Learning

Intentions

Methods of

growth

Success Criteria

• Learners should be aware of methods of

growth available to an organisation, be

able to describe the methods, give

reasons for using each method and give

any drawbacks to the method.

• Methods include: organic growth,

mergers and acquisitions/takeovers,

diversification, divestment, de-

integration, asset stripping, demerger,

buy-in, buy-out and outsourcing.

2

Organic Growth

• When a business decides to grow on their own

without getting involved with other organisations.

• Businesses can grow through:

- launching new products/services

- opening new branches or expanding existing branches

- introducing e-commerce

- hiring more staff

- increase production capacity.

3

Advantages/Disadvantages of

Organic Growth

Advantages

• Less risky than taking over

other businesses

• Can be financed through

internal funds (e.g. retained

profits)

• Builds on a business’

strengths (e.g. brands,

customers)

• Allows the business to

grow at a more sensible

rate.

Disadvantages

• Growth achieved may be

dependent on the growth of

the overall market

• Harder to build market share

if business is already a leader

• Slow growth – shareholders

may prefer more rapid

growth

• Franchises (if used) can be

hard to manage effectively.

4

Integration

When two businesses become one. There

are two ways that this can happen:

1. Takeover/acquisitions

2. Merger

5

1. Takeovers/Acquisitions

• When one business (usually a larger business) buys

another (usually smaller) business. This can often be

hostile and comes as a result of the smaller business

struggling financially and the larger business exploiting

the situation.

• Takeovers (also known as acquisitions) sometimes result

in the smaller business’ stores or outlets taking the name

of the larger one, as was the case when Spanish bank

Santander took over Abby National. Sometimes the larger

company just wants to add another product or service to

its portfolio, for example, when Google bought YouTube.

6

Advantages/Disadvantages of

Takeovers/Acquisitions

Advantages

• The buying

business gains the

market share and

resources of the

taken-over

business.

• Risk of failure can

be spread.

• Economics of scale

can be achieved.

• Competition is

reduced, which will

increase sales.

Disadvantages

• Integration can lead to job losses in the

taken-over business as the buying business

wants its own management and employees.

• If the buying business moves the

headquarters or production to its home

country/area, this can have a bad effect on

the taken-over business’ local economy

• Integration can be bad for customers as less

competition means higher prices.

• A change of name can put off loyal

customers of the taken-over business.

• It can be expensive to acquire another

business. 7

Horizontal Integration

• Two businesses providing the same

service, or producing the same

product, join together (eg two

airlines joining together).

• This will cause the business to

become bigger, gain a greater market

share and will reduce the number of

competitors in the market.

• As a result of fewer competitors,

higher prices could be charged by the

business.

• It also allows the business to gain

economies of scale, which will in

turn lower production costs and

increase profit.

8

Vertical Integration

When businesses in the same

industry, but who operate at

different stages of production,

join together this is called

vertical integration. This cuts

out the middle-men involved

with two separate businesses,

and therefore cuts costs. There

are two types of vertical

integration:

• backward vertical integration

• forward vertical integration.

9

Backward Vertical Integration

• Taking over a supplier, e.g. a jeans

manufacturer taking over a cotton farmer.

• By taking over a supplier it means that

the business should have sufficient

supplies available at reasonable prices, as

they will not need to add the element of

profit to raw materials.

10

Forward Vertical Integration

• Taking over a customer, eg a jeans

manufacturer taking over a jeans

shop.

• By taking over a customer this will

mean that supplies are readily

available to the shop, helping to

ensure regular sales.

11

2. Mergers

• A merger is when two

businesses of approximately

the same size agree to

become one.

• This will allow sales and

market share to increase.

• This is often friendlier than

a takeover and can result in

a new name and logo for the

new, merged organisation.

12

Advantages/Disadvantages of Mergers

Advantages

• Market share and resources are

shared, which can spread risk of

failure and increase profits.

• Economies of scale can be

achieved.

• Each business can bring different

areas of expertise to the merger.

• Unlike a takeover, jobs are more

likely to be spared in both

businesses.

• Can overcome barriers to entering

a market, such as strong

competition.

Disadvantages

• Customers may dislike the

changes a merger may bring

e.g. new logo, new name

etc… as the familiarity of

the previous business are

lost.

• Marketing campaigns to

inform customers of

changes can be expensive.

• Can be bad for customers as

less competition will mean

higher prices.

13

Diversification

• Diversification is when two businesses that provide different goods and

services join together.

• It is also referred to as a conglomerate.

• It will reduce the risk of failure by operating in more than one market and

will also allow profit to be obtained from more than one market.

• Diversification can also occur when one business decides to begin trading

in a new market, eg a supermarket deciding to open an optician or

pharmacy.

• This also reduces risk and allows for increased profits.

14

Divestment

• Divestment is when a business sells off some

of its assets or smaller parts of the business to

raise finance.

• The parts of the business that are sold off are

normally less profitable and this finance can be

put back into the business.

15

De-integration (or De-merger)

• De-integration (or demerger) occurs when a business

splits into two or more separate businesses.

• It will allow new organisations to focus their

resources on core activity and become more efficient,

therefore cutting costs.

16

Advantages/Disadvantages of

De-integration (or De-merger)

Advantages

• Each new ‘component’ can

concentrate on its own core

activities and grow as a result.

• Each new component has the best

chance to operate efficiently.

• De-merged components can be

divested which can meet

competition regulations, set by the

EU.

Disadvantages

• Customers may be put off

by the de-merger and

abandon the business

altogether.

• There are significant

financial costs involved, for

example, in re-branding

shop fronts, marketing

campaigns to inform

customers of the change.

17

Asset Stripping

• The process of buying an undervalued

company with the intent to sell off its assets

for a profit.

• The individual assets of the company, such as

its equipment and property, may be more

valuable than the company as a whole due to

such factors as poor management or poor

economic conditions.

18

Buy-in

• This is where an outside management

company buys the business as it believes it can

manage it more successfully.

• It is commonly seen in cases where the

existing business is struggling to achieve

success in the market.

19

Buy-out

• This involves an interested party buying or

taking over control of the firm.

• This may be the existing management where

they think that the owner’s vision for the

business will not lead to any great success.

• It could also refer to an employee buyout

where the employees get together to fund

buying the existing business.

20

Outsourcing

• A practice used by different

companies to reduce costs by

transferring portions of work to

outside suppliers rather than

completing it internally.

• An example of a manufacturing

company outsourcing would be Dell

buying some of its computer

components from another

manufacturer in order to save on

production costs.

• Alternatively, businesses may decide

to outsource book-keeping duties to

independent accounting firms, as it

may be cheaper than retaining an in-

house accountant.

21

Advantages/Disadvantages of

Outsourcing Advantages

• Specialists can be used to do the

work.

• It reduces staff and other costs in the

area that has been outsourced.

• Outsourced companies will have

specialist equipment.

• The specialist firm may carry out the

task to a higher standard.

• The service can be provided cheaper

as the unit cost for the specialist

supplier may be lower.

• The service needs to be paid for only

when it is required.

• Organisations can concentrate on core

activities.

Disadvantages

• The service can be more expensive as

the specialist supplier will add their

own profit to the price changed.

• Organisations can lose control over

outsourced work.

• Sensitive information may need to be

passed to the specialist supplier.

• Communication needs to be very

clear or mistakes can arise.

• Bad publicity may arise if staff are

made redundant as a result.

• If the specialist supplier fails to

deliver then the business will be seen

in a bad light.

22