WEEK 8 Growth

Strategies
Q1: What are the different growth strategies that can be adopted by a firm?
Answer 
A firm can grow:
 horizontally (expanding their existing capacity by acquiring or combining their current
assets with those of another company and/or competitor)
 vertically (acquiring firms on the vertical supply chain)
 organically (expanding within the same market)
Q2
How can a firm grow horizontally? What are the benefits of integrating horizontally?
Answer
 
Companies can expand their existing capacity by acquiring or combining their current assets with
those of another company and/or competitor. Merging two similar companies is referred to as
horizontal growth because the company is growing its current operations. Thanks to horizontal
expansion firms can exploit economies of scale and rationalization. Rationalization is associated
with cutbacks in excess resources in the pursuit of increased operational efficiencies.

Q3
What are transaction costs? When are transaction costs likely to be high?
 Answer
Transaction costs are the costs associated with organizing the transaction of goods or services.
As the product or service becomes more complex, the more incomplete the contract becomes.
As the contract becomes more incomplete, the higher are the costs of transacting.

Q4
What is the hold-up problem? How does the hold-up problem explain vertical integration?
 
Answer
A firm which produces specific assets can sell only to a particular user of the product. Hence, it is
at a bargaining disadvantage and the buyer can exploit this fact for renegotiating a lower price.
This is the hold-up problem. A monopoly supplier or buyer is likely to bargain for the highest
possible price for the inputs or the lowest possible price for the end product. This places the
other firm at a disadvantage and increases its transaction costs.The firm will grow vertically along
the vertical chain whenever the market refuses to supply products for fear of the hold-up
problem.

Q5:
What are economies of scope? How is control related to economies of scope?

 
Answer
Economies of scope are said to exist if the cost of producing two or more outputs jointly is less
than the cost of producing the outputs separately. Diversification will add value for shareholders if
the control of the economies of scope reduces transaction costs. For example, licensing a brand
to other users a firm would run the risk of a third party damaging the brand. However, when the
firm takes the brand into many different markets the integrity of the brand is the sole
responsibility of the firm. It retains control over the use of the brand and reduces its transaction
costs.

Q6
Write a short note on organic growth.
 
Answer
Organic growth is an increase in sales from the same or comparable retail space. When a firm
expands within the same market, the resulting increase in sales is termed as organic growth.

Q7
Explain the profit-maximizing level of output and profit with respect to the total revenue and
total cost curves.
 Answer
A firm seeking growth must be expecting to gain from increases in total revenues and/or
decreases in total costs. In this way, the two curves will move further apart from each other and
both the profit-maximizing level of output and the amount of profit-maximizing profit will increase.
When the distance between the two curves is the greatest, profits are maximized.

Q8
Explain the concept of the learning curve.
 Answer
The learning curve suggests that, as cumulative output increases, average costs fall. As the firm
produces additional output, its cumulative output increases. By learning how to make the product
more efficiently, the cost per unit falls. Therefore, so long as the curve is downward sloping, the
learning experience continues to reduce costs.

Q9
Explain why firms grow vertically.
 
Answer
A vertical chain of production encapsulates the various stages of production. A company is said
to be vertically integrated if it owns consecutive stages of the vertical chain. Vertical integration
allows firms to reduce transaction costs and the hold-up problem

Q10
Diversification can reduce a company’s exposure to risk. Explain.
 Answer
A company may grow in a diversified way to offset risk associated with operating in a single
product category. This can be done by expanding into another product line through diversification

Q11
a) Explain what is meant by the term horizontal integration.
b) Evaluate the benefits of mergers in the beer industry?

Answer
Explanation:
a) Horizontal integration occurs when two companies (usually rivals) operating at the same stage
of the value chain agree to combine their companies. For example, if two supermarkets agreed
to combine their operations, then this would be horizontal integration. In contrast, if a
supermarket agreed to combine its company with say one of its suppliers, then this would be
vertical integration.

b) There are undoubtedly economies of scale in the beer industry. On the production side, huge
brewing facilities bring enormous cost efficiencies. Distribution and logistics are more effective at
larger volumes. Whilst marketing and advertising become more cost effective when you can take
a brand to the world market, rather than the local market.
 
In markets such as beer, where ownership of companies is becoming consolidated, then there
are also potential pricing benefits from being a bigger, more powerful player. Less competition
brings lower price elasticity.
 
Finally, in a global market, where demand appears to be growing fastest in the developing
economies of the world, then you need deep pockets and good cash flows to support your
investment in products and new markets. Size and scale help to give you the resources needed
to extend your market reach. Merging and achieving costs savings and sharing product portfolios
are good tactics in seeking to become the leading beer company.