3.1 Business Growth

Question 1

Explain why some firms tend to remain small

Answer 1

-Retain Brand Prestige
-Small Market Size
-Lack of Economies of Scale
-No incentive to grow

Question 2

Explain the Public Sector

Answer 2

-Owned by the Government
-Provide goods and services for the benefit of the community

Question 3

Explain the Private Sector

Answer 3

-Businesses are operated and owned by individuals and companies
-Run for Profit - to earn return for owners and shareholders

Question 4

Explain for-profit organisations

Answer 4

-Companies generally assumed to pursue maximising profit

Question 5

Explain Not-For-Profit organisations

Answer 5

-Operate to fulfil other social objectives
-Social Enterprise
-Charities

Question 6

Explain the meaning of the divorce of ownership and control in a business

Answer 6

-Owners of larger private sector companies often elect a board of directors to control the businesses resources
-When the owners sell shares they may sacrifice some control
-For most PLC’s shareholders are not actively involved in running the company in a day2day basis
-This is the principal agent problem

Question 7

Explain the potential problems that the divorce of ownership and control in a business might create

Answer 7

-The problem is that the principal cannot always ensure that the agent runs the company in the way that they would like

Question 8

Explain the impact of demergers on business

Answer 8

Increased business specialisation leads to greater efficiency- i.e each business becomes more focused/ specialised
However some firms might lose some economies of scale- raising costs

Question 9

Explain the impact of demergers on workers

Answer 9

Some may gain promotions due to new roles created
However some could lose their jobs if each firm improves efficiency

Question 10

Explain the impacts of demergers on consumers

Answer 10

If demerged firm is more efficient, lower prices
Larger incentive for innovation through more competition
However the opposite could happen if efficiency decreases

Question 11

Explain the reasons for demergers

Answer 11

Experts surveys suggest that over 75% of mergers fail to achieve the benefits they are supposed to (costs of production are to high, profits arent as large as predicted
Businesses have different objectives for their business

Question 12

Explain disadvantages of external growth

Answer 12

Higher cost compared to internal growth
Valuation problems- overpaying due to misinformation
Clash of management/ business culture
Alienation of customers and employees
Diseconomies of scale

Question 13

Explain advantages of conglomerate integration

Answer 13

Diversification- spreads risk by entering new markets
Good option if little scope for growth in existing markets
Greater scope for cross selling to existing customers

Question 14

Explain advantages of external growth

Answer 14

Easier access to funds needed to expand
much faster growth
gain a bigger market share quicker

Question 15

Explain advantages of a horizontal merger

Answer 15

Gain a bigger market share and can create a monopoly
achieve larger combined profits
Benefit from economies of scale e.g cheaper transport costs
reduce competition

Question 16

Explain advantages of vertical merger

Answer 16

give businesses easier access to resources or consumers (depends)

Question 17

What are the different types of economies of scale

Answer 17

Technical- production of the good becomes cheaper as better access to new tech
Financial- The bigger company has cheaper access to capital and can borrow more from banks as they have better credit
managerial economies of scale- larger firms can afford specialists and better managers
transport- transport can be shared and costs reduced

Question 18

Explain advantages of internal growth

Answer 18

Less risky than taking over other businesses
Can be financed through internal funds (e.g. retained profits)
Builds on a business’ strengths (e.g. brands, customers)
Allows the business to grow at a more sensible rate