Business Jargons

Benefits of a growing business

Business expansion has potential benefits and drawbacks. Some owners are reluctant to take the risk of growing the business and opt to stay small.
As a business grows it gains two major advantages over its smaller rivals. Large firms have more influence over market price. They're big enough to be price setters.

Large firms also often enjoy economies of scale. This means that a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales.
For example, if a large firm can produce a given type of sunglasses for £20 while it costs its smaller rival an average of £30, then the larger firm has a £10 per unit cost advantage. Larger firms can charge lower prices or enjoy a higher profit margin.
Economies of scale are a major source of competitive advantage for large firms.

Methods of expansion

A business can grow in size through:
Horizontal integration is when two companies at the same stage of the production process merge or take over each other.
If Ford Motor Company merged with Toyota Motor Company that would be an example of Horizontal Integration.

Vertical integration occurs when firms at different stages of the production process merge together. There are two types called:

• Forward vertical integration
• Backward vertical integration

In this example we are using the Ford Motor Company.
Forward vertical integration is when Ford buy out or merge with their customers, which in this case could be a car showroom (eg Arnold Clark).
Backward vertical integration would be when a company like Ford buy out or merge with their suppliers. Suppliers to a major automobile manufacturer could be car electrics, glassmakers or in this example a rubber plantation which is used to make tyres for the car wheels.
Diversification or conglomerate integration is when firms in different, unrelated markets merge. This would be the equivalent of Ford and Nokia combining.
A merger is when two companies decide to join together, like for example when Halifax and Bank of Scotland combined to form HBOS.
A takeover is more hostile. This is when a company (usually a larger one) buys out a rival. Kraft Foods bought out Cadbury's in early 2010 for £12 billion.
A demerger occurs when a firm divides or breaks into more than one company. Cable & Wireless, the famous UK communications firm will demerge into Cable & Wireless Worldwide plc and Cable & Wireless Communications plc, the new name for Cable & Wireless International.
Divestment is when a company sells off an asset to raise finances. In 2003, Stagecoach, the Scottish bus operator, sold off its Coach USA operations in Texas for £18 million.
Outsourcing is when a company hires another business to do some work for them. Many firms outsource cleaning or IT operations to smaller, more specialist companies.

From BBC Higher Bitesize