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Economics- Theme 3 > 1- Business Growth > Flashcards

1- Business Growth Flashcards

1
Q

What is a Small and medium enterprise?

A

Has fewer than 250 employees - 99% of Uk businesses.

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2
Q

What is a social enterprise?

A

Profits reinvested for social purposes.

E.g. Salvation Army, British Heart Foundation, Big Issue

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3
Q

What is a nationalised business?

A

Public Sector businesses, often run not for profit but in the national interest.
E.g. Royal Mail, NHS

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4
Q

What is a Private Limited Company (PLC)?

A

A private sector business that trades its shares publicly on the stock market with a minimum share of capital of £50,000.

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5
Q

What is a Private Limited Company (Ltd)?

A

A private sector business where shares are held privately and are not trade on the stock market. Limited means the amount investors might lose is limited to the value of their share capacity.

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6
Q

What is a Partnership?

A

A business structure where partners share responsibility for the business.

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7
Q

What is a Sole Trader?

A

A single person business- usually self employed.

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8
Q

What is a cooperative?

A

Owned and run by their members- run according to the shared ownership, voice and profits.

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9
Q

How do small firms survive?

A
  • Subcontracted by large firms
  • Provide niche goods and services that are highly price inelastic in demand, leading to higher profits
  • Can avoid diseconomies of scale
  • Lifestyle enterprises- owners achieve “enough” profit- they don’t have to maximise
    Also known as Profit Satisficing
  • Can be innovative and flexible in responding to changes in the market
  • Easy to sell online e.g eBay without incurring costs of having physical shops
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10
Q

Why some firms remain small?

A
  • Niche market: demand is specialised/limited
  • Lack of economies of scale or to avoid diseconomies of scale
  • Need for a dynamic, responsive, service-led firms
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11
Q

Why do firms want to grow?

A
  • Economies of scale: larger firms may have lower cost per unit
  • Increased market share: more market power, control prices and retain consumer loyalty
  • Economies of scope: less exposed to focus, can be less focussed/ specialised
  • Psychological factors: managers may have greater job satisfaction, higher motivation of workers in high profile firm
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12
Q

What is the divorce between ownership and control: the principal agent problem?

A
  • Shareholders who appoint directors of big firms may have different motivations to them.
  • Shareholders want to maximise their dividend but manager might want to increase sales and revenues at the expense of profits
  • Principal agent problem- when aims diverge
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13
Q

Main objective of a private sector firm?

A
  • Private sector firm have to make profit to survive
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14
Q

Main objective of a public sector firm?

A 
-They can survive without making a profit because the government can make up for any shortfall
Aims could include:
- Profit
- To educate 
- To inform
- To entertain
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15
Q

What is organic business growth?

A

When firms grow from within by

  • Buying new capital
  • Taking on new workers
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16
Q

Advantages of organic growth?

A
  • Low risk

- Often the easier form of growth to manage

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17
Q

Disadvantages of organic growth?

A
  • Firm might not take on new ideas and get too specialised in certain areas becoming out of date
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18
Q

Examples of organic growth?

A

John Lewis and Lego

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19
Q

What is external growth?

A

Growth by buying out other firms either by agreement (mergers) or taking them over (acquisitions).

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20
Q

3 ways a firm can grow externally

A
  • Horizontal integration
  • Vertical integration
  • Conglomerate integration
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21
Q

What is horizontal integration?

A

When firms merge at the same production process. It doesn’t necessarily have the same product but are likely to increase product range or keen to get into new markets

22
Q

Advantages of horizontal integration?

A
  • Economies of scale
  • Increased market share
  • Elimination of threatening competition
  • Remove risk of being bought out
23
Q

Disadvantages of horizontal integration

A
  • Focus of risk on a narrow range of goods and services
  • Diseconomies of scale
  • The share price of the firm being bought may rise, meaning the buyout is very expensive
  • Some workers might lose their jobs if the roles in the new bigger firm are duplicated e.g head of some resources
  • Some workers might have to move or travel further
  • Some assets might be sold off (e.g. duplicated capital equipment) which might be wasteful
24
Q

Example of horizontal integration

A

When Kraft bought Cadbury in 2010

25
Q

What is vertical integration ?

A

This is when firms merge at different stages of the production process. This can be broken down into two types:

  • Backward vertical integration
  • Forward vertical integration
26
Q

2 types of vertical integration?

A
  • Backwards vertical integration

- Forwards vertical integration

27
Q

What is backward vertical integration?

A

It means that one firm buys another firm that is closer to the raw material stage of production.

28
Q

Example of backward vertical integration?

A

A steel maker buying a coal production firm is backward vertical integration because iron/steel production uses coal.

29
Q

Advantages of backward vertical integration

A
  • Control over raw materials supply is guaranteed.
  • Other firms might be prevented from getting the supplies
  • The supplier’s mark up can become profit from the buying firm
30
Q

Disadvantages of backward vertical integration

A
  • The firm might not need all the supplies
  • The firm might not have specialist knowledge of production
  • The firm might find it hard to adapt to changes in consumer demand e.g. buying a sugar factory when demand is shifting to artificial sweetners
31
Q

What is forward vertical integration?

A

This means buying another firm in the same production process but closer to the customer.

32
Q

Example of forward vertical integration?

A

A brewery buying a chain of pubs

33
Q

Advantages of forward vertical integration

A
  • Buying a retail outlet might guarantee that consumers see a firm’s product at their best.
  • The consumer may not be distracted by competition from other products.
  • Market research is more effective and the firm can adapt in response to consumer preference
34
Q

Disadvantages of forward vertical integration

A
  • The firm on its own might not offer enough range or choice for consumers.
  • The firm might not have marketing and sales expertise
35
Q

What is lateral integration also known as?

A

Conglomerate integration or ‘diversification’

36
Q

What is conglomerate integration?

A

It occurs when a firm buys another firm in a completely unrelated business.

37
Q

Advantages of conglomerate integration

A
  • Its spreads the risk- profitable areas can cross-subsidies loss making areas.
  • Different products do well at different parts of the business cycle
  • Brands can become better recognised
38
Q

Disadvantages of conglomerate integration

A
  • Lack of expertise in new areas

- Brands might become diluted

39
Q

Constraints of business growth

A
  • Size of the market - increase output but have to drop prices
  • Access to finance - hard for small firms to borrow
  • Owner objectives- owners may want to keep firm in the family
  • Heavy government regulation- governments want to stop monopolies developing
40
Q

What is a demerger?

A

It’s when a firm decides to split into separate firms by selling off parts of the firm

41
Q

Reasons for demergers

A
  • To focus on core business and perhaps develop that part to gain benefits of specialisation
  • To raise finances (by selling shares in new company)- asset sales and return to shareholders
  • To avoid diseconomies of scale - merged firms can be difficult to manage.
42
Q

Impact of demergers on businesses

A
  • Demergers allow focus on the core business, raising funds from selling parts of the business and removing loss making parts of the business.
43
Q

Impact of demergers on businesses

A
  • Increased job security if loss making parts are demerged, reduced conflict between cultures, increased focus on business to enable it to be more profitable- some may lose jobs and it could be an opportunity for managers.
44
Q

Impact of demergers on managers

A
  • Greater competition leads to lower prices

- More focussed businesses able to better meet consumer needs but some parts of the service may be limited

45
Q

Examples of demergers

A
  • Pearson selling of the Financial Times and its controlling stake in the economist
  • Lloyds TSB split into 2 firms
  • Pfizer and Nestle
46
Q

Examples of merger failures

A
  • Microsoft and Skype- huge financial costs leading to debts
  • eBay and Skype- too difficult to integrate IT systems
47
Q

Advantages of small firms

A
  • Can provide niche good/ service
  • Contract to large firms
  • Can be innovative/ flexible
  • No diseconomies of scale
48
Q

Disadvantages of large firms

A
  • Higher costs
  • Mass produced goods not always desirable
  • Bureaucratic- slow to respond
  • Can get too large and see rising average costs
49
Q

Key motivations of business growth

A
  • Economies of scale (lower long run unit costs)
  • Build and sustain your market power
  • Improve shareholder returns from higher operating profits
  • Reduce the risk of a hostile takeover
  • Pursuit of managerial objective
  • Synergy effects I.e. from having bigger sales platforms
50
Q

Example of a successful merger?

A

Walt Disney and Pixar- 2006

Economics- Theme 3 (19 decks)

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