Chapter 3
Measuring Business
size
Learning
Objectives
• Business growth
• Types of business growth
• Advantages and disadvantages of
Business growth
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Business Growth
Owners need their business not to remain in same position and they need
to expand the business for several reasons. The following includes the
reason beyond this .
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Reasons for business growth
Increased Profit
Expanding the
business and
achieving higher
sales to become
profitable
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Increased
Market share
Gives higher
market profile , so
they get greater
bargaining power
with both suppliers
and retailers
Increased EOS
Saving in cost by
increasing the level
of production
Increased Power
and status
Reduced risk of
being a takeover
Gain Publicity /
influence govt
policy if the
business grow , so
they are well
known
A larger business
become too large
for a potential
predatory company
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Types of business growth
Organic / Inorganic
Types of Internal Growth
Organic Growth (Internal)
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Inorganic Growth (External)
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Internal Growth
Strategies
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What is Merger
• Two or more companies agree to move
ahead and form as single company is known
as Merger
• Example : Idea and Vodafone
• Bharathi AXA
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Areas of growth
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Horizontal
Forward Vertical
Backward Vertical
Conglomerate
Same Industry , same
stage of Production
With customer Business
With supplier Business
Different Industry
Ex:Vodafone and Idea
Ex: Myntra Launched
Logistics service , Vehicle
manufacturer buys car retail
shop
Ex: Retailer buys a
wholesaler business , Apple
manufacturing its chip
Ex: L&T and Voltas
Ltd
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Horizontal Integration
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Horizontal Integration
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Advantages
Disadvantages
Impact on Stakeholders
Reduced competition. The
integration of two or more
companies typically results in less
competition.
Leadership or culture
clashes. Vastly different leadership
styles, company cultures and
organizational norms can make
difficult
• Consumers now have less choice
• May the price increases
• Workers may lose jobs due to
rationalization
Increased market share. greater
market share for the combined
company, as it expands the number
of products and services it offers.
Operational integration
challenges. The integration of
corporate operations, technologies,
processes and people can be messy
and can result in employee turnover,
customer churn and lost value
• Supplier may have to offer for
lower price as the company now
became big and there is no other
competitors to demand
Expanded customer base: each
one brings its own customers.
Less choice: there may be less
choice of products for the customers
in the market
• Shareholders depends whether
profit increase or not
Revenue growth. able to grow
Monopoly : it may lead to
their market share and customer
monopoly Investigation when
base will often see a lift in revenues. exceeds certain market share limits
Increased market power. The
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larger
company created through
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Backward and Forward Vertical Integration
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Backward Vertical Integration
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Advantages
Disadvantages
Impact on Stakeholders
• Gives control over Quality ,
price and delivery times of
suppliers
The business may lack the
experience of managing a
supplying company
successfully
• Workers have more career
opportunity
• Encourages joint research
Ex: Steel producer will not be
and development to improve good in managing the coal
quality of components
mine
• Consumers get improved
quality products and
innovative products too
• Now the business controls
the supplies of materials to
the competitors also
• Control over the supplies to
competitors may limit the
competition and choice for
the consumers
• Profit might rise to benefit
the shareholders
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Forward Vertical Integration
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• Advantages
• Disadvantages
• Impact on
shareholders
• Workers have secure
job because the
business have good
sales outlets
• The business now able • The business may
to control the
lack experience in
promotion and pricing
this sector of the
of its own products
industry – a
successful
manufacturer does
not necessarily
make a good retailer
• Gives secure outlet for
• Various career
the products and
opportunity
exclude competitors
• Consumers feel resent
products from retail
due to lack of
outlets
competitors in outlets
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Conglomerate Integration
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Advantages
Diversifies the
business away from its
original industry and
markets
Disadvantages
Impact on
shareholders
Lack of clear focus and Workers have more
direction towards new career opportunity
industry
This should spread risk Lack of management
and may take the
experience in new
business into a faster
industry
growing market
More job security as
spread across more
than one industry
Profits could rise to
benefit the
shareholders
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“
Why Merger or Take over might fail
to achieve Objectives
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Why might the objectives achieved ?
Research Facilities
Economies of scale
Integrated Businesses will be able
to share research facilities that
provide better results.
Cut down Average costs and
increases efficiency
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This will reduce the duplication
costs
They use same sales outlets and
sales team . So can save the
marketing and distribution costs
Rationalisation of Property/Assets
Save Marketing /Distribution Costs
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Why they fail to achieve the objectives ?
Different business and management
Culture
Diseconomies of Scale
https://www.investopedia.com/ask
/answers/013015/whatdiseconomy-scale-and-how-doesoccur.asp
Each company takes two different
sets of managers and workers –
may be difficult to work effectively
The directors cannot manage
effectively as the rate of growth is
too rapid
Rate of Growth is too rapid
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If the original businesses produced
different products
Little benefit for the combined research
department
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Problems and possible
strategies
Financial Problems
• Takeovers can be costly
• Additional fixed capital and working capital is
required
• Could lead to negative cashflow and an increase in
long term borrowing /interest payments
Strategies to overcome
• Use internal sources of resources ex: retained profits
• Raise finance from share issues
• Offer shares not cash to pay for a takeover
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Problems and possible
strategies
Managerial Problems
• Existing management may be unable to cooperate
• Lack of coordination between divisions of expanding
business
• Culture clash b/w two management
Strategies to overcome
• New management systems and structures are required
• Decentralisation policy could motivate mangers with
clear focus
• New management culture to be put in place rapidly
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Joint ventures and strategic Alliances
• Joint venture and strategic alliances are further form of external
growth
• Strategic alliance is a form of external growth that does not involve
complete integration or changes in ownership.
• Strategic alliances are similar to joint ventures - and you’ll notice that
many tend to use the two terms interchangeably - but there is one key
difference: With a strategic alliance, no new legal entity is created.
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Strategic Alliances
A strategic alliance is a type of agreement between two
companies to mutually reap the benefits of a particular project.
Both agree to share resources and thus result in synergy to
execute the project, resulting in a higher profit margin. In
addition, both companies retain their independence outside the
project’s scope
References: https://www.wallstreetmojo.com/strategicalliances/
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Strategic vs Joint venture
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Past Questions
QUESTION 1:
‘A family retail business should stay small rather than setting growth
as an objective.’ Do you agree? Justify your answer. [20]
(S2; Q6; 9609/12/M/F/18)
QUESTION 2:
Analyse the impact of small businesses on the development of a
country. [8]
(S2; Q5: a; 9609/13/M/J/19
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Esther Mary
Thank you
esthermaryjoseph@gmail.com