3.1 Flashcards
Why firms grow
Firms may grow to gain greater market share allowing them to have more infulnce on prices + restrict the ability of others to enter the market
Larger firm will have more assets + cash to be used in financial dificulty
Bigger range of goosa in more than 1 market so will be less affected by changes in prices
Growing firms experience Economies of scale decreasing costs of production + sell more goods
Why firms do not grow
Contraints on growth
Size of the market
Acesses to finance
Owner objectives and regualtion
Priciple agent problem
Firms are owned by shareholders who are represented by a board of directors, these people do not work day to day.
Managers are employed to make day to day decisions but may have different objectives to the board of directors such as sales or reveune maximisation
Organic growth
Occurs as firms increase their output through increased invesment within the firm by the firm
Advantages of organic growth
Integration is expensive, time consuming and high risk- often is poorly managed leading to a decrease in the share price
Firm is able to keep control over all production and managemnt in their business
Disadvantages of organic growth
- Somtimes another firm has a market or asset which the company would not be able to obtain organically e.g european firm trying to enter asian marker ( no expertise)
- Organic growth is slow
- difficult to get new ideas
Integration
Growth through almagamation, merger or takeover
Verticle integrstion
Integration of firms in the same industry but at different stages of the production process
Backwards integration - purchasing towards the supplier
Forwards integration - purchasing towards the eventual consumer product
Advantages of verticle integration
Increased potential for profits
Less risk as suppliers/buyers do not have to worry wehter their service will be sold/be able tobe bought
With backwards integration firms can control the quality of deilvery keeping costs low
Forwards integration secures retail outlets that competitiors now cant have
Disadvantages of verticle integration
Firms may have no experitsemij the production process they just took over
Horizontal integrarion
Firms in the same industry at the same time at the same stage of production amalgamating
Advantages of horizonal integrarion for firms
Reduces competition, increasing market share
Firms area able to specilise ans ratioanlise reducing inefficeny
Business is able to grow in a market which it already has expertise in
Disadvantages of horizonal integrarion for firms
Increased risk for businesses as if their particular market fails they have nothing to fall back on
Conglomerate integrarion
Where firms from different industries with no obvious connection amalgemate
Advantages of conglomerate integration
Useful when thereis no room for growrh in the current market
Reduces risk if the whole industry fails
Easier for each individual part of the business
Disadvantages of conglomerate integration
Firm going into market which it has no expertise in could be damaging
Constraints on busniess growth
Size of makeet- niche markets cannot expand massively as their is not the demand for their products
Access to fiannce- either profits or loans. Banks are unwilling to lend to small businesses as it is risky for them
Regulation- goverment allow monoploies to formed and protected. Licensing is also needed in some industries which may be hard to get
Marketing barriers- risk of taking on “sunk costs” costs that cannot be recouped
Owner objectives
Firm may have already exploited all economies of scale so any firther incresse would be diseconomies of scale
Demergers
Single busniess is broken down into 2 or more components
Reason for demergers
Some firms grow too large and experience diseconomies of scale, as a result managemente may lose control contibuting to increasing average costs
Lack of synergies, different part of the company have no real effect on each other
Value of the company share price may be higher as seperate entites
Compnay will become more efficent as the broken down company will become more specilised and efficent
Avoids attention from the competition authorities
Impacts of demergers
Workers - could gain more senior positions as both seperate companies will need management roles however as firms aim to become more efficent this leads to job losses
Firms- more foucsed and therefore more efficent however lack of size could lead to diseconomies of scale
Consumer- gain from innovation and increased efficiency due to more choice and higher quality products for cheaper. Lose throguh loss of economies of scale and therefore raised prices and lack of quality of choice
