3.1 Buisness growth Flashcards
what’s a public sector organisation?
organisations that are owned and controlled by the state
what are private limited companies?
corporations whose shares are not listed on a public exchange
what are co-operative producers?
Owned and run by their members
how do small firms survive?
- supplier to large buisnesses
- low price elasticity of demand for bespoke/niche products
- can avoid internal diseconomies of scale
- owners look for satisfaction over profit
- flexible in changes to market demand
- keep over head costs low
small firms objectives?
- survival
- revenue maximastion
- profit maximastion
- cost effiecieny + scale
- good customer service
key reasons to stay small?
- product differentiation + USP
- flexibility in meeting customer needs
- delivering a high standard of customer service
- exploit opportunities for e-commerce
- avoid risk of higher unit cost
whats the principle-agent problem?
an asymmetric information problem, owners/share holders of a firm often cannot observe directly the day-to-day decisions of management - the decisions and and performance of agents are costly and hard to manage
how is the principle-agent problem solved?
best interest of management is not always the best interest of of the shareholders (these are tried to be made the same)
- make directors shareholder
- reporting what directors do
- set targets that directors need to meet
- employment share ownership skills
- long term employment contracts for senior managment
- long term stock commitment
what is privatisation?
transfer of assets from the public (state or government) sector to the private sector of an economy – privatisation causes a change of ownership
whats organic growth?
Business grows internally through its own resources
how can businesses grow organically?
- increasing existing production capacity
- launch of new products
- finding new markets by exporting into emerging countries
- new distribution channels eg online
- marketing
✅ of organic growth
- less risk
- financed through internal funds
- builds on a business strengths
- more sensible and sustainable rate
- more control
- less complicated
- self-sufficient
- no integration problems
❌ of organic growth
- dependent of growth of entire market
- if alr a leader hard to build market share
- slow growth
- franchises can be hard to manage effectively
what’s horizontal intergration?
between two businesses in the same industry at the same stage of production
✅ of horizontal intergration?
- exploit internal economics of scale
- cost savings eg jobs
- diversification, making a wider range of products
- reduces competition with key rivals
- can be cheaper in the long run than organically growing a brand
- economies of scope
- lower LRAC
❌ of horizontal intergration?
- Risk of diseconomies of scale
- reduced flexibility
- destroying shareholder value rather than creating it
- Risk of attracting investigation from the competition authorities
- increased workloads
- increased responsbility
what’s vertical integration?
acquiring a business in the same industry but at a different stage of production
- forward, closer to consumer
- backwards, further from consumer (eg primary sector bought)
✅ of vertical intergration?
- control of the supply chain ➡️ reduce unit costs
- improved access to raw materials (rival pay more)
- better control over retail distribution channels
- taking market intelligence/suppliers from the competition
- guaranteed sources of raw/outlet for products
- reducing costs of distribution and cost of middlemen
- transportation costs are reduced
❌ of vertical integration?
- fewer economies of scale as production is at different stages
- mergers can often create new problems of communication and co-ordination with the bigger firm ➡️ diseconomies of scale if bigger firms inefficient
whats a congolmerate intergration?
aquired a large number of diversified buisnesses
eg of a congolmerate intergration?
Samsung, makes phones but also makes military hardware, apartments, ships and operates an amusment park
who do mergers and takeovers fail?
- huge financial cost of funding takeovers
- integrating systems (companies might have different technology systems that are expensive or impossible to marry)
- share price (raise fresh equity which can reduce shareholders value)
- fail to enhance shareholders value because of clashes of corporate cultures
- business may suffer a loss of customers + skilled workers
- overpaying
- bad timing (eg end of boom)
what are joint ventures?
when businesses join together to pursue a common project but remain separate in legal terms
what are the constraints on buisness growth?
- regulations, authorities may block mergers if they would dominate the market too much
- competition, in contestable markets there is always the threat of entry from rival firms
- finance, smaller businesses often don’t have the funds/limits to loans
- size of the market, limits to scalability
- lack of human capital/skills shortage
- Bureaucratic
- in sufficient funds to train people
✅ conglomerate integration?
- diversification
- reduced risk, less vulnerable to losses in one area
- spreads ideas
❌conglomerate integration?
- diversification is the riskiest of integration strategies since it almost always means a step into the relative unknown
- shifting its focus from its core business to other business
what is a demerger?
when a firm decides to split into different firms
causes of a demerger?
- focusing on core buisness, cuts costs
- reduces the risk of diseconomies of scale and diseconomies of scope
- raise money from asset sales
- a defensive tactic to avoid the attention of competition authorities
eg - pfizer selling their infant nutrition buisness to Nestle
constraints of organic growth ?
- size of market ➡️ if markets small businesses can only grow to that level
- access to finance ➡️ hard to acess finace businesses will struggle to grow
- owner objective ➡️ main objection not being growth so other aims would be met first
- regulations
what are the different not-for-profit organisations?
- producer co-operatives (ran and owned by there members)
- social enterprises (to help a social issue)
what are the differences between profit and non for profit organisation?
- profit organisations are aiming to create profit and maximise share holder value
- not for profit businesses are operated commercially but with social welfare and environmental aims in mind (typically profits are reinvested for social purposes and aims)
charities, community organisations that are run on commercial lines
✅ of conglomerate intergration
- diversification of risk
- access to new markets
- hedges against business cycles
❌of conglomerate integration ?
- integrating challenges, difficulty to integrates two completely different businesses
- increased risk of failure
- shareholder disaproval
- lack of focus
