3.1/3.2 Business Objectives and Growth

Question 1

Give two reasons why firms tend to stay small

Answer 1

Retain brand prestige - keep supply of luxury brands low
Small market size - major constraint on growth

Question 2

Give two reasons why firms tend to grow

Answer 2

Increased revenue and market share - increases market power and ability to set higher prices
Economies of scale

Question 3

Explain the difference between private and public sector organisations

Answer 3

Public - Not for profit and in national interest
Private - For profit and profit maximisers

Question 4

Explain the meaning of divorce of ownership and control

Answer 4

Owners of large private sector firms elect a board of directors to control resources. When shares are sold some of the control is lost

Question 5

Explain the problem that may occur from divorce of ownership and control

Answer 5

The owner cannot always ensure that the agent runs the company in the way that they would like. The objectives of the owners and managers may be different

Question 6

Explain how a business may overcome this problem

Answer 6

The owners could provide incentives in such a way that the managers are encouraged to follow the owners objectives. Eg, bonuses or shares in the company

Question 7

Explain how a small industry can constrain business growth

Answer 7

The industry is too small to grow into, firms will have to find growth opportunities outside the industry

Question 8

Explain how lacking access to finance can constraint business growth

Answer 8

Small and medium sized enterprises (SMEs) find it difficult to borrow money and have limited ways of raising funds in other ways

Question 9

Explain how having a business objective which does not prioritise growth will affect business growth

Answer 9

If the objective is survival the business may not seek expansion opportunities

Question 10

Explain how government regulation through the CMA may be a constraint on business growth

Answer 10

Mergers may be blocked if there is a “substantial lessening of competition”

Question 11

Explain what is meant by internal growth

Answer 11

When a firm increases its own scale of production

Question 12

Give two examples of internal growth

Answer 12

Opening new retail outlets
Expanding production facilities

Question 13

Explain what is meant by external growth

Answer 13

When a company expands through a merger, amalgamation or takeover

Question 14

What are the 3 types of integration

Answer 14

Horizontal
Vertical
Conglomerate

Question 15

Explain horizontal integration

Answer 15

When two business’ in the same industry at the same stage of production become one

Question 16

Explain forward and backwards vertical integration

Answer 16

When a business acquires a business in the same industry but at a different stage of production
Forward - Acquiring a distributor
Backwards - Acquiring a supplier

Question 17

Explain conglomerate integration

Answer 17

When a business buys another firm in an unrelated industry, often to spread risk

Question 18

Give two advantages of internal growth

Answer 18

Less risky than taking over other business’
Can be financed through internal funds

Question 19

Give two disadvantages of internal growth

Answer 19

Growth achieved may be dependant on the overall growth of the market
Harder to build market share if the business is already a leader

Question 20

Give two advantages of horizontal integration

Answer 20

Increased market share and pricing power
Increases barriers to entry preventing new entrants

Question 21

Give two advantages of conglomerate integration

Answer 21

Diversification - Spreads risk
Greater scope for cross-selling existing products to new customers

Question 22

Give two advantages of vertical integration

Answer 22

Control of the supply chain - reduces costs and improves reliability of supply
Removing suppliers and information from competitors makes the market more contestable

Question 23

Give two disadvantages of external growth

Answer 23

Value of the demerged firms may be greater than a merged firm
Lack of synergy and diseconomies of scale

Question 24

Give two reasons for demergers

Answer 24

Cost - Costs are usually much greater for external growth compared to internal growth
Clash of business cultures - Principle agent problem

Question 25

Explain how demergers may affect business’

Answer 25

Benefits the firm if increased specialisation leads to greater efficiency
Firms will lose out if demerger increases inefficiencies and costs

Question 26

Explain how demergers may affect workers

Answer 26

Some workers may gain promotion as a result of new roles being created
Some workers could lose jobs if efficiency is increased

Question 27

Explain how demergers may affect consumers

Answer 27

If demerger is more efficient consumers gain as prices will be lower / greater competition provides greater incentive to innovate - no guarantee that prices will fall due to lower costs of production

Question 28

What is the condition for profit maximising

Answer 28

MR = MC
Assumed in most market structures

Question 29

What is the condition and reasoning for sales maximisation

Answer 29

AR = AC
May be a short-run objective in order to capture market share before profit maximising in the long run

Question 30

What is the condition and reasoning for revenue maximisation

Answer 30

MR = 0
Managers may receive pay related bonuses based on revenue targets

Question 31

Explain profit satisficing

Answer 31

Managers if a firm ensure that they make enough profit for shareholders to be satisfied

Question 32

Show all maximising positions on a cost and revenue diagram

Answer 32

refer to powerpoint