3.1 Business growth

Question 1

Define firm

Answer 1

an organisation that brings together factors of production in order to produce output.

Question 2

Name the three types of comparisons of firms

Answer 2

1) Private and public

2) Profit maximising, not for profit

3) MNCs and small sole traders

Question 3

Name 5 reasons why businesses grow

Answer 3

1. Profit motive
2. Cost motive (Economies of scale)
3. Market power motive
4. Risk motive (diversification)
5. Managerial motive

Question 4

Name 5 reasons why businesses stay small

Answer 4

1. Low economies of scale
2. Family businesses/personal service
3. Niche market/premium
4. Not for profit
5. Lifestyle choice of owner/ desire to retain control

Question 5

Define the divorce of ownership and control

Answer 5

When those that own the business (shareholders) don’t control the activity of the businesses

Question 6

What is a public limited company?

Answer 6

Company with shares sold on stock exchange

Question 7

What is the principal-agent problem?

Answer 7

Owners don’t know if agents are maximising shareholder value in short and long run

Question 8

Define organic growth

Answer 8

growth from within. a business through buying new capital, taking on more workers etc

Question 9

Name 2 advantages and a disadvantage of organic growth

Answer 9

Advantages: Low risk, easy to manage

Disadvantages: May become too specialised

Question 10

Define vertical integration

Answer 10

Where two firms merge at different stages of the production process

Question 11

Name 2 advantages and 2 disadvantages of backwards vertical integration

Answer 11

Advantages: control over raw materials means guaranteed supply, supplier’s mark up can become profit for integrated firm

Disadvantages: firm may not have specialised knowledge, firm may not need all supplies

Question 12

Name 2 advantages and 2 disadvantages of forwards vertical integration

Answer 12

Advantages: consumer not distracted by competition, firm can adapt to consumer preference quicker

Disadvantages: firm may not have enough choice on its own, firm may not have sales expertise

Question 13

Define horizontal integration and an example

Answer 13

When firms merge at the same stage of production e.g Ford buying Vauxhall

Question 14

Name 2 advantages and 2 disadvantages of horizontal integration

Answer 14

Advantages: Economies of scale, increased market share

Disadvantages: diseconomies of scale, risk as narrow range of goods

Question 15

Define conglomerate integration

Answer 15

Firm buys another firm in an unrelated market

Question 16

Name 2 advantages and 2 disadvantages of conglomerate integration

Answer 16

Advantages: spreads risk, different products do well at different parts of business cycle

Disadvantages: lack of specialist knowledge, brand may become diluted

Question 17

Name 5 constraints on business growth

Answer 17

Size of market

Low economies of scale

Access to finance

Owner objectives (family businesses)

Regulation (e.g CMA prevents certain mergers)