3.1 Business growth Flashcards
Why do firms stay small?
Worried about DEOS if they expand
Owners do not want extra work and risks of expansion
Less regulations by remaining small
Unable to finance expansion (small firms face high interests rate as risky to banks)
Operating in niche market with small customer base (low PED and high YED)
Owners happy with current levels of profit
Can benefit from external economies of scale
Overhead costs kept low
Pros of organic growth
Less riskier than external growth
Financed through internal funds (retained profits)
Builds on existing strengths
Sustainable rate of growth
Control of firm remains the same
More job opportunities in the firm for management roles
Cons of organic growth
slow growth
franchises are hard to manage - principal agent problem
Horizontal integration pros
companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process
reduced average costs due to EOS
reduced competition in market due to increased market share (leading to purchasing EOS, financial EOS, more pricing power)
greater expertise in market - more likely to be successful merger
diversify products (risk bearing EOS
Horizontal integration cons
Risk of DEOS, clash in managerial styles and cultures
More legal accountability and red tape, less flexibility
Competition authority increased scrutiny
Constraints on business growth
Increased attention to competition authorities and regulation increased
Firms may enter contestable market and compete away dominant firms who are working inefficiently
Financial constraints
Size of Market
economies of scope
where it is cheaper to produce a range of products rather than specialize in a handful of products
vertical integration pros
acquiring a business in the same industry but at different stages of the supply chain
control of supply chain
improved access to raw materials
control over retail distribution
removing suppliers and taking mkt intelligence away from competitors
vertical integration cons
fewer economies of scale
problems of communication between bigger firm
conglomerate integration
A merger between firms in unrelated business
diversification of business
gain synergies
no past experience
complications
hard to govern
revenue synergies
ability to sell more or raise prices after a merger
