Types of Business Growth (Cambridge (CIE) IGCSE Business)

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Written by: Danielle Maguire

Reviewed by: Steve Vorster

Reasons for Business Growth

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

Business growth can be achieved by growing organically, or inorganically (mergers and takeovers)

Organic (Internal) growth

Organic growth is growth that is driven by internal expansion using reinvested profits or loans
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
Google	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

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
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

Evaluation of 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

Inorganic (External) growth

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
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
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

Vertical integration refers to the merger or takeover of another firm in the supply chain or different stage of the production process
- 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
- 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

Horizontal integration

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

Evaluation of Types of 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

Last updated: 12 June 2024

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