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Business Growth

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Business Studies

A business that is not growing after all, is dying."

- Shawn Casemore

We all know that businesses want to grow. But did you know that companies can grow in more ways than one? And that some ways are faster than the other? Read along to find out about the different business strategies and how they differ from each other.

Business Growth Meaning

Business growth is the process through which an organisation expands and makes profits.

Business growth can be organic or inorganic. It is one of the most common objectives in business, as it helps the business increase sales, widen the product offering, increase overall revenue, strengthen the market position and so on.

Business growth is brought about in a company by adopting different business strategies depending on the business’s aim.

What are the Different Business Strategies?

The business growth strategies can be categorised as organic and inorganic growth.

Organic Growth

When an expansion happens from within a business, it is called organic growth. It is the increase in the number of business units, expansion in the product range etc.

The organic growth strategy depends on the company’s resources and capabilities. The following are the most common organic business strategies:

  • New product offerings

  • Reallocation of resources

  • Investing in new technologies

  • Process optimization

Organic growth ensures owners of their company’s control. This is a much slower process compared to inorganic growth.

Advantages of organic growth:

  • Internally financed

  • Lower risks (as compared to inorganic growth)

  • Company growth at a reasonable rate

  • Build according to the company’s strengths

Disadvantages of organic growth:

  • Slow process

  • Growth depends on market growth

  • Difficult for companies with franchises to manage them.

Inorganic Growth

Inorganic growth or external growth is a faster way for companies to grow and this happens mainly through mergers and acquisitions.

Acquisitions increase market share and boost a company’s earnings. Opening new stores and branches are also part of inorganic growth.

Advantages of inorganic growth:

  • Faster growth process

  • More market share and assets

  • More attractive for financial investors

  • More skilled management and their expertise

Disadvantages of inorganic growth:

  • Loss of control from owners

  • Need for more coordination and control

  • Corporate cultural changes

  • Large up-front costs

Examples of Business Growth

Examples of organic growth:

Poundland in the UK has adopted an organic business growth strategy. They focused on opening new stores in different locations to grow their business.

The popular toy brand LEGO has also grown organically through product innovation, which has helped them increase their revenue.

A1 Engineering solutions, Affiliate squared, and Alquity UK is a few companies in the UK that have grown organically.

Examples of inorganic growth:

The acquisition of Careem - a Dubai based vehicle for hire company - by the American mobility company Uber is an example of inorganic growth.

One of the most popular examples of inorganic growth is the acquisition of WhatsApp by Facebook.

Stages of Business Growth

A business growth goes through different stages and each stage has crises associated with it. Functions in a rapidly growing company may not be as smooth as it was before and managers may not be as efficient as they were before, as their span of control and responsibility increases. Greiner’s model helps in understanding the root cause of crises that an organisation may face during its growth phase. Understanding the model helps to foresee a problem before it occurs, helping organisations to take the required measures.

This model was proposed by Larry E. Greiner in 1972 with five phases of growth, which he then updated in 1998 with the sixth phase (see Figure 1 below). The six phases are:

  • Growth through creativity

  • Growth through direction

  • Growth through delegation

  • Growth through coordination

  • Growth through collaboration

  • Growth through alliances

Business Groth stages of growth Greiner's Model StudySmarterFigure 1. Greiner's Growth Model, StudySmarter

  • Growth through creativity

In this phase, there aren’t many staff, and the founders are busy innovating new products and trying to enter new markets. Informal communication works just fine during this stage. As the company starts to grow, the number of staff increases, and the workload increases, there is a need for formal communication and a change in management style is required. This phase ends with a leadership crisis.

  • Growth through direction

Now, there is more formal communication in the workplace. The activities become more intense and numerous, making it difficult for them to be managed by one person. This phase ends with an autonomy crisis, calling for new structures based on delegation.

  • Growth through delegation

The autonomy crisis is solved in this phase, and the company now has functional management. Having functional management means having the organisation grouped into areas of speciality to better manage each functional sector. This helps reduce chaos in the company, as each manager can take necessary and well-informed actions in their departments. The problem arises when the founder or the entrepreneur finds it hard to pass their control to the newly assigned managers. This leads to a control crisis.

  • Growth through coordination

Coordination is important for a company facing a control crisis. It helps bring together every functional area and ensures efficiency. This process adds many layers of hierarchy to the system, increasing bureaucracy and leading to a red-tape crisis.

  • Growth through collaboration

Collaboration helps in simplifying and standardizing formal systems. Managers and employees are given more educational training programs. Collaboration helps with acquiring more resources such as different marketing channels, various products and services, etc. During the collaboration phase, companies experiment with new technologies and processes which cause changes within the company’s people and their practices. This phase results in an internal growth crisis.

  • Growth through alliances

This phase is the latest addition to Greiner’s growth model. This phase shows that companies facing an internal growth crisis can be saved by strong strategic alliances to form growth strategies. It also suggests the option of acquiring another company for expanding or growing the organisation. This is the last phase of the model.

Types of Business Growth

There are many types of growth in a business and they include:

  • Vertical integration

  • Horizontal integration

  • Conglomerate integration

Vertical Integration

Vertical integration is when a company acquires ownership of another company in its production line.

This saves money and time and increases efficiency. Figure 2 shows how vertical integration can be forward or backwards.

  • Backwards vertical integration - acquisition of ownership of companies up the supply chain. When a company expands to perform tasks previously performed by companies that supplied raw materials for production is called backwards vertical integration. This occurs when the company realises that it is better off in terms of time and money to source raw materials themselves rather than outsourcing the job. Companies can either merge or acquire their suppliers, or have their own subsidiary for the task.

  • Forward vertical integration - company strategy wherein the company owns and acquires operations of businesses ahead in the supply chain. In a forward vertical integration, the company distributes and sells its products to customers directly, rather than having a third party do it. Forward integration can also be done either by merging, acquiring or by having a subsidiary for the task.

Business Growth Vertical integration, StudySmarterFigure 2. Vertical Integration, StudySmarter

Horizontal Integration

Horizontal integration is the acquisition or merging of companies operating at the same level in the same industry.

It creates economies of scale, increases product differentiation, increases revenue, and helps companies enter into new markets. Companies in horizontal integration benefit from synergies.

Synergy occurs when the combined value of two companies becomes greater than the value of the two separate companies operating individually.

Although horizontal integration is beneficial for the company, it can lead to joblessness, and changes in the business can have a negative impact on customers. Another drawback is that purchasing another company can be expensive. Figure 3 outlines how horizontal integration works.

Business Growth Horizontal integration, StudySmarterFigure 3. Horizontal Integration, StudySmarter

The process of companies from different market sectors merging together is known as conglomerate integration.

An investment banking company such as HSBC merged with Vodafone, a telecommunications brand.

This strategy helps spread the risk across several markets and helps target new markets. The newly acquired market brings in more customers and revenue. The acquiring company can learn the know-how of the acquired company, and also acquire its customers. Take a look at Figure 4 for a visual reference.

If the acquiring company does not have enough knowledge to run the newly acquired business, this could hurt both companies' business activities. Another drawback is having to share expertise and resources while entering into new markets, which could hurt the core activities of the acquiring company.

Business Growth, Conglomerate Integration, StudySmarterFigure 4. Conglomerate Integration, StudySmarter

These are the different ways in which companies grow. Next time you hear about a business expansion, it might be interesting to analyse and understand what type of growth strategy the company has adopted.

Business Growth - Key Takeaways

  • Business growth is the process through which an organisation expands and makes profits.
  • When an expansion happens from within a business, it is called organic growth.
  • Inorganic growth or external growth is a faster way for companies to grow and this happens mainly through mergers and acquisitions.
  • Greiner’s model helps in understanding the root cause of crises an organisation may face during its growth phase.
  • The six phases of business growth are 1) Growth through creativity 2) Growth through direction 3) Growth through delegation 4) Growth through coordination 5) Growth through collaboration 6) Growth through alliances.
  • Types of business growth include - Vertical integration (forward and backwards), horizontal integration, and conglomerate integration.
  • Vertical integration is when a company acquires ownership of another company in its production line.

  • Horizontal integration is the acquisition or merging of companies operating at the same level in the same industry.

  • The process of companies from different market sectors merging together are known as conglomerate integration.

Business Growth

Business growth is the process through which an organisation expands and makes profits. Business growth can be organic or inorganic.

The business growth strategies can be categorised as organic and inorganic growth. Organic growth is when an expansion happens from within a business. It is the increase in the number of business units, expansion in the product range etc. Inorganic growth or external growth is a faster way for companies to grow and this happens mainly through mergers and acquisitions. 

Growth is important for a business to survive. Growth strategies are what help a business enter new markets, offer new products and services, invest in new technology, and so on. Business growth also facilitates more employment due to the need for more staff within a growing business.

The business growth model has six phases, and they are as follows:


1. Growth through creativity


  • informal communication

  • number of staff increases, and the workload increases

  • change in management style is required

  • phase ends with a Leadership Crisis


2. Growth through direction


  • formal communication in the workplace

  • phase ends with an Autonomy Crisis


3. Growth through delegation


  • functional management

  • leads to a Control Crisis


4. Growth through coordination


  • adds many layers of hierarchy to the system

  • increasing the bureaucracy

  • leads to a Red-tape Crisis


5. Growth through collaboration


  • simplifying and standardizing the formal systems

  • managers and employees are given more educational training programs

  • acquire more resources

  • companies experiment with new technologies and processes 

  • results in an Internal Growth Crisis


6. Growth through alliances


  • strong strategic alliances to form growth strategies. 

  • option of acquiring another company

 The types of business growth include:


  • Vertical integration (forward and backwards)

  • Horizontal integration

  • Conglomerate integration.

Final Business Growth Quiz

Question

Define diseconomies of scale.

Show answer

Answer

Diseconomies of scale are defined as the increase in average cost per unit in a firm when the company output grows above a certain point.


Show question

Question

Briefly explain the concept of economies of scale.


Show answer

Answer

Economies of scale are the decrease in average cost per unit as the output volume increases. This can be observed when the production becomes efficient and is mainly seen in large companies, as they have a high output volume. A high output volume helps to distribute fixed costs among the produced units, thereby decreasing the average cost per unit. Learning, efficient capital, specialisation, and negotiation power are factors affecting economies of scale. 

Show question

Question

What are the different types of external diseconomies of scale?

Show answer

Answer

There are mainly three types of external diseconomies of scale - diseconomies of pollution, limited natural resources, and infrastructure diseconomies.  

Show question

Question

What is the diseconomy of pollution?


Show answer

Answer

When firms grow and set up factories, they impose costs on the local population in the form of pollution in the local surroundings, as this can lead to several health issues. Poor health is one of the main results of this type of diseconomy. 

Poor health: Pollution caused by factories have long-lasting damaging effects on different human organs, causing innumerable health issues.

Show question

Question

Explain the results of the diseconomy of scale caused by the limited natural resources.


Show answer

Answer

High prices:  Prices of the end product increase as the resources to produce the product becomes higher due to its scarcity. 


Higher salaries: Labourers that possess a talent or skill not known to a lot of others can negotiate for a higher salary.

Show question

Question

 Briefly explain infrastructure diseconomies.

Show answer

Answer

Infrastructure diseconomy is when a company grows to the point that it puts a strain on the local infrastructure. For example, if all the companies were to increase the number of trucks to decrease the delivery, this would lead to traffic blocks on roads, putting a strain on the local infrastructure. Moreover, this increases the delivery time due to traffic, leading to more costs, as costs increase as the delivery time increases.

Show question

Question

What are the different internal diseconomies of scale?


Show answer

Answer

Technical, organisational, purchasing, competitive/monopoly, and financial diseconomies are the types of internal diseconomies of scale.   


Show question

Question

What are the results of technical diseconomies of scale?


Show answer

Answer

Overcrowding: This is the increase in production beyond reasonable capacities. This could be having too many factory workers or employees in a store. Too many employees end up duplicating each other’s work and increasing the company’s overall cost.


Scalability: When a firm is functioning very efficiently in some locations and decides to expand but the new outlets turn out to be inefficient. This also increases the overall cost of production drastically.



Show question

Question

Name the results of the organisational diseconomies of scale.


Show answer

Answer

Inefficient communication, demotivation, and employee health

Show question

Question

 Which of the following are the results of purchasing diseconomies?

Show answer

Answer

Higher costs, greater waste, and deadlock.


Show question

Question

___________ and ___________ are the results of a competitive/monopoly diseconomy of scale.


Show answer

Answer

Higher cost and more competition.

Show question

Question

Why is high levels of interest a result of financial diseconomy of scale?

Show answer

Answer

If the funding to purchase the asset were not organically funded by the company and the firm borrows from external sources, it will then have to pay high levels of interest to the banks and lenders, as the company is at a higher financial risk.


Show question

Question

Name a few examples of diseconomies of scale.


Show answer

Answer

Higher cost of materials, poor communication and inefficient management are some examples of diseconomies of scale.

Show question

Question

Briefly explain poor communication as a result of diseconomies of scale.


Show answer

Answer

As the company grows and employs more people, communication among the staff can become very difficult and inefficient. You might not know who the right contact person is in an international organisation. Sending emails rather than direct communication becomes a usual practice, which can sometimes cause important details to be overlooked.


Show question

Question

Explain the higher cost of materials as an example of diseconomies of scale. 


Show answer

Answer

As companies grow as their demand for resources increase. Firms in the same industry have similar resource requirements and the resources become scarce as their demand increases. This, in turn, increases the cost of materials.


Show question

Question

Explain inefficient management as an example of diseconomies of scale.


Show answer

Answer

Inefficient management is a result of rapid growth in an organisation. The management fails to understand that the rapid growth in a company can lead to a decrease in employee morale due to the increase in employees and workload. The lack of training does not allow managers to properly look after their employees as a result of which, they do not perform as much as they can.


Show question

Question

 Define organic growth.

Show answer

Answer

When an expansion happens from within a business, it is called organic growth. It is the increase in the number of business units, expansion in the product range etc.

Show question

Question

List the different organic growth strategies.


Show answer

Answer

The most common organic business strategies:


  • New product offerings

  • Reallocation of resources

  • Investing in new technologies

  • Process optimization

Show question

Question

What are the advantages of organic growth?

Show answer

Answer

Advantages of organic growth:

  • Internally financed
  • Lower risks (as compared to inorganic growth)
  • Company growth at a reasonable rate
  • Build according to company’s strengths


Show question

Question

What are the disadvantages of organic growth?


Show answer

Answer

Disadvantages of organic growth:

  • Slow process
  • Growth depends on market growth
  • Difficult for companies with franchises to manage them.


Show question

Question

Briefly describe inorganic growth.


Show answer

Answer

Inorganic growth or external growth is a faster way for companies to grow and this happens mainly through mergers and acquisitions. Acquisitions increase market share and boost a company’s earnings. Opening new stores and branches are also part of inorganic growth.


Show question

Question

List the advantages of inorganic growth.


Show answer

Answer

Advantages of inorganic growth:

  • Faster growth process
  • More market share and assets
  • More attractive for financial investors
  • More skilled management and their expertise


Show question

Question

What are the disadvantages of inorganic growth?


Show answer

Answer

Disadvantages of inorganic growth:

  • Loss of control from owners
  • Need for more coordination and control
  • Corporate cultural changes
  • Large up-front costs


Show question

Question

 What are the six stages of growth in an organisation?


Show answer

Answer

The six phases are:


  1. Growth through creativity
  2. Growth through direction
  3. Growth through delegation
  4. Growth through coordination 
  5. Growth through collaboration
  6. Growth through alliances


Show question

Question

 List in order, the different crises a growing company experiences according to Greiner.


Show answer

Answer

Leadership crisis, autonomy crisis, control crisis, red-tape crisis, internal growth crisis. 


Show question

Question

 List the 3 main types of growth.


Show answer

Answer

Vertical integration (forward and backwards), horizontal integration, and conglomerate integration. 


Show question

Question

What is forward vertical integration?


Show answer

Answer

Company strategy wherein the company owns and acquires operations of businesses ahead in the supply chain. The company distributes and sells its products to customers directly, rather than having a third party do it. It can also be done either by merging, acquiring or by having a subsidiary for the task.

Show question

Question

What is backward vertical integration?


Show answer

Answer

Acquisition of ownership of companies up the supply chain. When a company expands to perform tasks previously performed by companies that supplied raw materials for production is called backwards vertical integration. Companies can either merge or acquire their suppliers, or have their own subsidiary for the task. 


Show question

Question

What are the effects of horizontal integration?


Show answer

Answer

It creates economies of scale, increases product differentiation, more revenue, helps them enter into new markets and benefit from synergies. It can lead to joblessness, and changes in the business can have a negative impact on customers. 

Show question

Question

Define conglomerate integration with an example.


Show answer

Answer

The process of companies from different market sectors merging together are known as conglomerate integration. 


For example, an investment banking company such as HSBC merged with Vodafone, a telecommunications brand.


Show question

Question

What are the advantages of conglomerate integration?


Show answer

Answer

This strategy helps to spread the risk across several markets, and target new markets. It brings in more customers and revenue, and the acquiring company can learn the know-how of the acquired company, and also acquire its customers.

Show question

Question

What are the drawbacks of conglomerate integration?


Show answer

Answer

If the acquiring company does not have enough knowledge to run the newly acquired business, this could hurt both the business activities. Another drawback is having to share expertise and resources while entering into new markets, which could hurt the core activities of the acquiring company.

Show question

Question

When an expansion happens from within a business, it is called...

Show answer

Answer

organic growth.

Show question

Question

New product offerings, reallocation of resources, investing in new technologies and process optimization are the most common ___ business strategies. 

Show answer

Answer

organic

Show question

Question

Organic growth is a much slower process compared to inorganic growth.

Show answer

Answer

True

Show question

Question

Organic growth is a much faster process compared to inorganic growth.


Show answer

Answer

False

Show question

Question

This type of growth happens mainly through mergers and acquisitions. What type of growth is it?

Show answer

Answer

inorganic growth

Show question

Question

The acquisition of Careem - a Dubai based vehicle for hire company - by the American mobility company Uber is an example of...


Show answer

Answer

inorganic growth.

Show question

Question

The acquisition of WhatsApp by Facebook is an example of inorganic growth.

Show answer

Answer

True

Show question

Question

Poundland focused on opening new stores in different locations to grow their business. What type of growth is it?

Show answer

Answer

organic

Show question

Question

Inorganic growth is also called...

Show answer

Answer

external growth.

Show question

Question

This phase of business growth ends with a leadership crisis. What is it?


Show answer

Answer

Growth through creativity

Show question

Question

Economies of scale are the increase in average cost per unit when the output of a firm increases above a certain point.

Show answer

Answer

False

Show question

Question

The increase in ___ volume should not exceed a certain amount, as this will then lead to diseconomies of scale.


Show answer

Answer

output

Show question

Question

Overcrowding and scalability are caused by ___ diseconomies of scale.

Show answer

Answer

technical

Show question

Question

Communication, demotivation, and employee health are effects of ___ diseconomies of scale. 


Show answer

Answer

organizational 

Show question

Question

Higher costs, greater waste, and deadlock are results of __ diseconomies.

Show answer

Answer

purchasing

Show question

Question

Monopoly diseconomies lead to...


Show answer

Answer

higher cost and more competition.

Show question

Question

An expanded workforce and high levels of interest are the results of ___ diseconomies. 


Show answer

Answer

financial  

Show question

Question

As a result of overspending, future purchase decisions might have to go through many levels of approval, just to get rejected at the end (due to the drastic increase in expenses caused by the purchases). This will stop or halt the company's progress. What do we call it?

Show answer

Answer

Deadlock

Show question

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