3:1:1 Business Growth Flashcards
What is a Firm?
Is a production unit
What does a Firm do?
It turns Resources into goods and services
What is an Industry?
Is the term used to describe a collection of firms operating in the same production process.
What do Firms aim to do?
Make a profit
What happens to a Firm if they do not make a profit?
Go out of business (unless they are state funded)
What are some reasons why firms tend to grow?
- Increase market share
- Benefit from greater profit
- Increase Sales
- Increase economies of scale
- gain power
- Satisfy managerial ambitions
- Make the most of an opportunity
- gain expertise
Reasons why some firms tend to grow - Increase Market Share
- Become a dominant Firm in the market
- Allow them to increase their profits by setting prices in a market
Reasons why some firms tend to grow - Benefit from greater profits
- Firm aims to maximise profits and can achieve this through expansion
- Increasing Sales
- Setting Prices
- Economies of Scale
Reasons why some firms tend to grow - Increase Sales
- Larger brand recognition
Reasons why some firms tend to grow - Increase economies of scale
- Firm can exploit its increased size and lower long-run average costs
Reasons why some firms tend to grow - Gain Power
- Prevent takeover by larger business
- Can survive economic downturns
Reasons why some firms tend to grow - Satisfy managerial ambitions
- Share prices rise
- Leave a legacy of growth
What are Private Sector Firms?
Are Firms that are not owned by the government
Can shareholders owned a Private Sector Firm?
Yes
What is the aim of Private Sector Firms?
Aim to make a profit to satisfy demands of their owners
What is a Public Sector Firm?
Government owned business
Why may a government own a business?
- Could not survive without significant funding
- Government wishes to determine the direction the business takes
What is the Not for Profit Sector?
Consists of charities, third sector, which exists to provide services to communities, and do not see profit as the primary goal.
What is Internal Growth?
Is when firms grow by investing in its current operations or by extending its range of operations
What is External Growth?
Is when a firm grows by joining with other firms, usually through merger or takeover
What can External Growth also be called?
Inorganic Growth
How is Organic Growth paid for by a business?
- Retained Profits
- Borrowing (issuing shares, loans)
What are the Advantages of Organic Growth?
- Lowest-risk form of growth and control remains unchanged
- Good for workers morale and means there will be more work opportunities within the firm.
What are the Disadvantages of Organic Growth?
- Slow
- People May not want to take on change
What 2 different types of Inorganic Growth is there?
- Horizontal Integration
- Vertical Integration
What is Horizontal Integration?
Firms joining at the same stage of the production process
Why is Horizontal Integration used?
Chosen because
- Can achieve economies of scale in order to increase market share
What are Barriers to entry?
Factors preventing a company from leaving a market
What kind of Barriers to Exit are there?
- Legal Barriers (Permits, patents)
- Brand loyalty
What is Vertical Integration?
This is a merger between firms at different stages of the productive process within an industry.
Why do business choose to Vertically Integrate?
- Increase Barriers to entry (Increase Control over suppliers or markets)
What is Forward Vertical Integration?
Merger with a firm at the next stage of production
What is Backward Vertical Integration?
Merger with a firm at the previous stage of production.
What is a Conglomerate Integration?
Merger between firms in unrelated industries
What are the aims of Conglomerate Integration?
- Spread the risk
- Firms can cross subsidies investment
What are the purpose of Barriers to Entry and Exit?
Obstacles that ensure the continued monopoly power of firms in a market
Constraints on Business Growth (Barriers to Entry and Exit) - Regulation
- Government can prevent the Entry or growth of a Firm
- Can allow monopolies to be formed and protected
What are Patents?
Give Firms legal protection to ensure that ideas and processes are protected from competition for the life of the patent
What is a License?
permission or permit to do, use, or own something.
What two Methods can the Government use to prevent business growth?
- Patents
- License
What are Marketing Barriers?
Are Barriers imposes by Businesses currently operating in an industry
What are Sunk Costs?
Investment that is lost and not recouped
What are the different factors that constraint business growth?
- Regulation
- Marketing Barriers
- Pricing Barriers
- Technical Barriers
- Size of the Market
- Lack of resources and access to finance
- Economies of Scale
- Owner Objectives
How do technical barriers create barriers to entry ad Exit?
Large firms use technical expertise and economies of scale to ensure they operate at the lowest possible average cost, new firms entering the industry cannot compete because their average costs are higher due to their smaller scale.
What is a Horizontal Demerger?
Firms splitting at the same point of the production process.
What are the Advantages to Firms of Horizontal Mergers?
- Increased market share
- Economies of Scale
- Reduction Competition
What are the Disadvantages to Firms of Horizontal Mergers?
- Risky (too much for a firm to handle?)
- Unknowns Costs
- Dilution of Brand
Advantages of a Horizontal Merger to Employees or other stakeholders.
- Opportunities for promotion
- Increase prestige of Firm
Disadvantages of Horizontal Mergers to Employees or other stakeholders.
- Loss or jobs for those duplicating or unable to move to new headquarters
What are the advantages to firms of Horizontal Demergers?
- Reduced risk of a potential risky market
- Removal of Diseconomies of Scale
What are the disadvantages to a firm of a Horizontal Demerger?
- Seen as a sign of weakness
- Share price might fall
What are the advantages of a Horizontal Demerger to Employees or other stakeholders?
- Increased job security because less risk risk in the company
What are the disadvantages of a Horizontal Demerger to Employees or other stakeholders?
Some loss of jobs as parts of the business are closed down.
Advantages to firms of a Backward Vertical Merger?
- Assured supplies in timing and quality
- Reduced costs of supply
Disadvantages to firms of a Backward Vertical Merger?
- Lack of expertise
What are the advantages of a Backward Vertical Merger to Employees or other stakeholders?
- Widening expertise and opportunities for promotion
- Increased market presence and profitability might increase share price in the long run.
What are the disadvantages of a Backward Vertical Merger to Employees or other stakeholders?
- Initial Cost May damage profitability and cause share price to drop in the short run
Advantages of Forward Vertical Mergers to Firms?
- Greater access to customers
- Removal of competing suppliers
- better information about the final consumer
What are the disadvantages of Forward Vertical Mergers to Firms?
- Lack of expertise
What are the advantages of Forward Vertical Merger to Employees or other stakeholders?
- Widening expertise and opportunities for promotion
- Increased market presence and profitability might increase share price
What are he disadvantages of Forward Vertical Mergers to Employees or other stakeholders?
- Initial Costs May damage profitability and therefore share price
What are the advantages of Vertical Demergers to Firms?
- Avoids negative attention from competition authorities
- Decreases risk
What are the disadvantages of Vertical Demergers to Firms?
- Cost Savings are Lost
- Loss of Investment
What are the advantages of Vertical Demergers to Employees and other stakeholders?
- Increased returns for investors
- - Can focus an a single product
What are the disadvantages of Vertical Demergers to Employees or stakeholders?
- Fewer opportunities for promotion
What is the process of Conglomeration?
When firms that are involved in unrelated business areas merge
What are the advantages to firms of Conglomeration?
- Spreads the risk
- Widens brand awareness
What are the disadvantages to firms of Conglomeration?
- Dilution of Brand
What are the advantages to Employees or other stakeholders of Conglomeration?
- Increased job security
What are the disadvantages of Conglomeration to Employees or other stakeholders?
- Firm might be too big to be effectively organised
Constraints on business growth - Size of Market
If the firm is in a niche market that will not support expansion, there is little scope for growth
Constraints on business growth - Lack of resources and access to finance
Owner may lack the knowledge and funds ended for expansion
Constraints on business growth - Minimum efficient scale
Increasing a Firms output when it’s already working at its most productively efficient point could lead to inefficientcies
What is a Demerger?
The separation of a larger firm into two or more smaller organisations.
Reasons for Demerging?
- Firms grow too large and experience Diseconomies of Scale, Firms Can then concentrate on their specialist areas and maximise their own economies of scale. As a result parts of the business are shut resulting in job losses.
1 Example of a recent Demerger.
- 2014 Lloyd’s TSB
- European Commission order then to sell off their TSB part of the business
What is the impact of a Demerger on a business?
- To make the business smaller, causing it to reduce its market share and less monopoly power.
- Business May be less profitable, or may become more profitable if it becomes more efficient
What is the impact of Demergers on Workers?
- Workers can be forced to move location
- Duplication of Jon’s can lead to job losses
What is the impact of Demergers on Consumers?
- Can create more competition in the market therefore lower prices
Why do some firms remain small?
- Barriers to Entry
- Lack of Economies of Scale
- Competitive Advantages of staying small
- Maintain better relationships with customers than larger firms
How can the size of a firm be determined?
- Economies of scale relative to market size - Large firms might only experience small economies of scale compared to their size
- Diseconomies of scale - Larger firms could face high costs because they have grown too quickly.
- Market power - large firms have more dominance over the market,
What is the Principle Agent Problem?
Agent makes decisions for the principle, but the agent is inclined to act in their own interests, rather than those of the principle
- Can be linker to Asymmetric Information
- Aka, when one person is allowed to make decisions on behalf of another person.
