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Summary

This document discusses the internal and external growth of firms. Internal growth is generated through increasing sales by marketing effectively, investing in new equipment and labor. External growth occurs through amalgamation, merger or takeover (acquisitions). Mergers are agreed combinations between firms, while takeovers involve one firm seeking control of another. External growth also includes vertical integration (acquisitions at different production stages), horizontal integration (same production stage), and conglomerate mergers (different industries). Motives for growth include cost savings, shareholder value, managerial rewards, efficiency, synergy, and risk bearing. Key issues involve the separation of ownership and control in large firms, as well as managing the law of diminishing returns.

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83 views16 pages

Summary

This document discusses the internal and external growth of firms. Internal growth is generated through increasing sales by marketing effectively, investing in new equipment and labor. External growth occurs through amalgamation, merger or takeover (acquisitions). Mergers are agreed combinations between firms, while takeovers involve one firm seeking control of another. External growth also includes vertical integration (acquisitions at different production stages), horizontal integration (same production stage), and conglomerate mergers (different industries). Motives for growth include cost savings, shareholder value, managerial rewards, efficiency, synergy, and risk bearing. Key issues involve the separation of ownership and control in large firms, as well as managing the law of diminishing returns.

Uploaded by

api-529669983
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Business Growth

The Growth of Firms


The Growth of Firms

Internal Growth:
 Generated through increasing sales
 To increase sales firms need to:
› Market effectively
› Invest in new equipment and capital
› Invest in labour
The Growth of Firms

External Growth:
 Through amalgamation, merger
or takeover (acquisitions)
 Mergers – agreed amalgamation between two
firms
 Takeover – One firm seeking control over
another
› Could be ‘friendly’ or ‘hostile’
External Growth
 Vertical Integration
 Horizontal Integration
 Conglomerate Merger
The Growth of Firms

External growth – types of acquisition:


 Vertical integration – amalgamation, merger or
takeover at different stages of the productive
process
Vertical Integration
Primary Vertical
Integration
Backwards –
acquisition takes
place towards the
source
Secondary Manufacturer

Tertiary Retail Stores


Vertical Integration
Primary Dairy Farming Co- Vertical
operative Integration
Forwards –
acquisition takes
place towards the
market
Secondary Cheese Processing
Plant

Tertiary
Horizontal Integration
 Amalgamation, merger or takeover at the same
stage of the productive process
Horizontal Integration
Primary

Confectionery Soft Drinks


Secondary Manufacturer Manufacturer

Tertiary
Conglomerate Acquisition
 Amalgamation, merger or takeover of firms in
different lines of business.
Motives
 Cost Savings  Shareholder Value
› External growth may be › Improve the value of the
cheaper than internal growth – overall business for
acquiring an underperforming shareholders
or young firm may represent a
cost effective method of
 Asset Stripping
growth › Selling off valuable parts of
the business
 Managerial Rewards
› External growth may satisfy
 Economies of Scale
managerial objectives – › The advantages of large scale
power, influence, status production that lead to lower
unit costs
Motives

 Efficiency  Control of Markets


› Gain some form of monopoly
› Improve technical, productive or
power
allocative efficiency
› Control supply
 Synergy › Secure outlets
› The whole is more efficient than the  Risk Bearing
sum of the parts (2 + 2 = 5!) › Diversification to spread risks
Key Issues
 Divorce between ownership and control – who runs
the business?
› Shareholders?
› Board of Directors?
 Principal-Agent Relationship:
› Shareholders act as principals, Board as agents – principals expect
agents to act in their interest
› Sub-contracting work operates on a similar basis
› Contracts and compensation procedures to ensure agents act on
behalf of principals
Key Issues

 The Law of Diminishing Returns:


› Continued growth beyond the capacity of the
organisation can lead to diseconomies of scale if
poorly managed
› To prevent diseconomies of scale a firm will need to
invest in communication, co-ordination, motivation,
orgnaisation and planning specialists (i.e. efficient and
effective managers?)
Efficiency

Economies of Scale
 Technical
 Managerial
 Financial
 Purchasing
 Marketing
 Risk Bearing

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