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firms can grow from within (internal growth) by: increasing their workforce and output

GROWTH m m m m. firms can grow from within (internal growth) by: increasing their workforce and output increasing their market share ploughing back profits

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firms can grow from within (internal growth) by: increasing their workforce and output

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  1. GROWTH mmmm • firms can grow from within (internal growth) by: • increasing their workforce and output • increasing their market share • ploughing back profits however, internal growth (also known as organic) can be a slow process, so firms may look to grow faster by integrating with another firm

  2. REASONS FOR GROWTH • Survival – some firms may not survive unless they grow. Staying small might mean that costs are too high. May also face takeover bids from larger organisations. • Gaining economies of scale – as firms grow in size their costs per unit can decrease. • To increase future profitability – by growing and selling larger volumes profits will increase. • Gaining market share – may have an element of monopoly power. Personnel may enjoy the status and power which goes with a high market share. • To reduce risk–by diversifying into other markets. Branching into new markets or products means that if one area fails success in others can keep the company going.

  3. INTEGRATION INTEGRATION firms combining to to become larger/powerful MERGER integration on equal terms TAKEOVER (Hostile or Friendly) integration where one firm maylose its identity

  4. MERGERS AND TAKEOVERS • Businesses may merge with or takeover: • a firm in the same market ( Bank of Scotland and Lloyds Bank) • one of its suppliers (BMW and Continental Tyres) • one of its customers (Pepsi and Pizza Hut) • a firm which has a natural connection with the business (Scottish Media Group The Herald and STV) • a firm in a completely different market (Unilever)

  5. BACKWARD VERTICAL previous stage of production LATERAL similar production techniques TYPES OF INTEGRATION HORIZONTAL same stage of production CONGLOMERATE/ DIVERSIFYING different line of business FORWARD VERTICAL next stage of production

  6. Other Growth Strategies………….. • DIVESTMENT • Selling fixed assets to raise money for expansion • ASSET STRIPPING • takeover followed by selling off of assets • DE-MERGER • subsidiaries become companies in own right • CONTRACTING OUT/OUTSOURCING • paying other firms to fulfil certain activities • MANAGEMENT BUY-OUT/BUY-IN • buy-out ( managers from within parent company) • buy-in (mangers from outwith parent company)

  7. Past Paper Questions • 2004 Section 2 Q5 (a) (i) - Nestle and Cadbury have attempted to take over an American chocolate firm. This takeover is an example of horizontal integration. Identify and describe 2 alternative methods of growth. (4 marks) • 2004 Section 2 Q5 (a) (ii) - Why might growth be an objective for a firm? (4 marks) • 2005 Section 2 Q3 (c) - Levi and Pepsi-Cola’s move into a new market is an example of growth. Describe other methods of growth. (6 marks)

  8. Past Paper Solutions • 2004 Section 2 Q5 (a) (i) - Nestle and Cadbury have attempted to take over an American chocolate firm. This takeover is an example of horizontal integration. Identify and describe 2 alternative methods of growth. (4 marks) • Vertical • Forwards vertical • Backwards vertical • Merger • Franchising • Diversification/Conglomerate • Internal

  9. Past Paper Solutions • 2004 Section 2 Q5 (a) (ii) - Why might growth be an objective for a firm? (4 marks) • To increase sales • To increase profits • To increase market share • To dominate the market • To improve reputation • To spread risks by diversifying • To enter a new market • Ambition of the owner • Growth attracts investors

  10. Past Paper Solutions • 2005 Sec 2 Q3 (c) - Levi and Pepsi-Cola’s move into a new market is an example of growth. Describe other methods of growth. (6 marks) • Merger • Takeover • Horizontal Integration • Vertical Integration • Backward Vertical • Forward Vertical • Diversification/Conglomerate • De-integration • De-merger • Divestment • Asset Stripping • Contracting Out • Outsourcing • Management Buyout

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