1. Business Growth Flashcards
Reasons for firms to grow
^evonomies of scale
^market share
^security
What is the principle agent problem
Where share holders and managers have different priorities, and the agent makes decisions on the principles behalf. Leads to many firms profit satisficing instead of maximising.
How could you reduce the principle agent problem
Giving managers shares in the business
Private sector
Owned or controlled by individuals or groups of individuals
Public sector
Owned or controlled by local or central government
What is organic growth
Growth by increasing output
Ways to grow organically
-increase investment
-more labour
-open more stores
-increase range of products
Advantages of organic growth
-cheaper
-low risk
-keeps control of the business
Disadvantages of organic growth
-very slow
-hard to get new ideas
What is forwards and backwards verticle integration
Same industry, different stages of the production process
What is integration
Growth through mergers or takeovers
What is backwards integration
Firm going towards the supplier
What is forwards integration
Firm is towards the eventual consumer
Pros of verticle integration
-^profit potential
-less risk
-firms have input on quality
-low cost
Cons of verticle integration
-firms could have imperfect knowledge of the market
What is horizontal integration
Same industry, same level
Pros of horizontal integration
-reduced comp
-firms can specialise and rationalise
-firms have perfect knowledge
Cons of horizontal Intergration
-increased risk for business
What is conglomerate integration
Firms from Different industries merge
Pros of conglomerate integration
-if there is no room in current market
-reduced risk for the firm
-easier for individual parts to grow
Cons of conglomerate integration
-imperfect knowledge of the market
-could be damaging
Constraints of business growth
-size of market
-access to finance
-owner objectives
-regulation
What is a demerger
One firm is broken down into two or more components
Reasons for demmergers
-lack of synergy
-value of company share price
-focussed companies
