3.1- Business growth

Question 1

Why do firms grow?

Answer 1

-earn market power, which allows them to gain price setting powers and discourage enterance of new firms.
-profit motive
-diversification-firms reduce risk of making huge losses, since they have areas of market to fall back on.
-able to gain from economies of scale

Question 2

What is the principal- agent problem?

Answer 2

The conflict in interests and priorities that arises when one person (the agent) takes actions on behalf of another person (the principal)
- the owners want to maximise the returns on their investment so will want to short run profit maximise.
-However, directors and managers are unlikely to want the same thing , they would want to maximise their own benefits.

• Agent should maximise the benefits for those whom they are looking after, but in practice agents have the tempation to maximise their own benefits.
• Therefore, many firms are not run to profit- maximise but to profit satisfice.
• The issue could be overcome by giving managers shares in the business, this will mean that they personally will gain from higher profits.

Question 3

What is the public sector?

Answer 3

When the government has control of an industry.

Question 4

What is the private sector?

Answer 4

When a firm is left to the free market and private-individuals.

Question 5

What do free market economists believe about the private sector?

Answer 5

Gives firms incentive to operate efficiently, which increases economic welfare.
Increases allocative efficiency- firms produce goods and services consumers want.

Question 6

What is a profit organisation?

Answer 6

Aims to maximise the financial benefit of its shareholders and owners.

Question 7

What is a not for profit organisation?

Answer 7

aims to maximise social welfare.

Question 8

What is organic growth?

Answer 8

When firms grow by expanding their production thorough increasing output, by developing a new product, or diversifying their range.

Question 9

Advantages of organic growth

Answer 9

Less risky than inorganic growth.
No debt, as firms using their own funds and profit to fund the growth.
Firm is able to keep control over the business

Question 10

Disadvantages of inorganic growth?

Answer 10

• May be too slow for directors who wish to maximise their sales.
• Sometimes a firm or company has an asset or market which a company would be unable to gain through organic growth. For example, integration would allow a company to join with another.
• it will be more difficult for firms to get new ideas without integrating.

Question 11

What is vertical integration?

Answer 11

When a firm merges with or takes over another firm in the same industry, but at different stages of production.

Question 12

What is forward vertical integration?

Answer 12

When the firm integrates with another firm closer to the consumer. For example, a coffee producer might buy the cafe where the coffee is sold.

Question 13

What is backward vertical integration

Answer 13

When a firm integrated with a firm closer to the producer. A coffee might buy a coffee farm.

Question 14

Advantages of vertical integration

Answer 14

-firms can increase their efficiency, through gaining economies of scale.
-firms can gain more control of the market.
- there is increased potential for profit as the firm takes the potential profit from a larger part of the chain production.
- With backward integration, businesses can control the quality of supplies and ensure delivery is reliable.

Question 15

Disadvantages of vertical integration

Answer 15

-creates barriers to entry, might discourage entrance of new firms.
- firms may have no expertise in the industry they took over, for example a car manufacturing company would have little knowledge of selling cars.

Question 16

What is horizontal integration?

Answer 16

The merger of two firms in the same industry and the same stage of production.

Question 17

What are the advantages of horizontal integration?

Answer 17

Firms can grow quickly, making them more competitive.
Firms can increase output quickly, advantage of economies of scale.
- will help to reduce competition as a competitor is taken out and increases market share.
- The business is able to grow in a market where it already has expertise, which is more likely to make the merger successful.

Question 18

What are the disadvantages of horizontal integration?

Answer 18

Disagreements in the objectives of the two firms which merged.
Increase risk for the business as if that particular market fails, they have nothing to fall back on and will have invested a lot of money into that area.

Question 19

What is conglomerate integration?

Answer 19

Combining of two firms with no common connection. For example, bristish foods owns primark and patak’s

Question 20

What are the advantages of conglomerate integration?

Answer 20

-can help both firms become stronger in the market, than if they were individual.
-Advantages of economies of scale.
- the range of products reduces the risk for firms and if a whole industry fails, they will still survive due to other parts of the businesses.

Question 21

Disadvantages of conglomerate integration

Answer 21

There is a risk of spreading the product range too thinly, might not be sufficient focus on each range.
Firms are going into markets in which they have no expertise. It can often be damaging for the business.

Question 22

Name some constraints on business growth and explain

Answer 22

size of the market- small market might only have limited opportunities for business expansion. Their goods might not be bought by consumers. In particular, niche markets (specific products that few people want.

access to finance- smaller firms have less access to finance than larger, more established firms. Banks may be unwilling to lend firms money, particularly smaller businesses that they see as high risk.

owner objectives-some owners may not want their business to grow any further as they are happy with their current profit.

Regulation-limit quantity of output that a firm produces- environmental laws.

Question 23

What is “red tape”

Answer 23

Excessive regulation

Question 24

What is a demerger?

Answer 24

A demerger is when a large firm is seperated into multiple smaller firms, Example- if boots sold Halfords since it did not match their main activities.

Question 25

What are the reasons for demerging?

Answer 25

Lack of synergies- A synergy is when creating a whole company is worth more than each company on its own.- without this firms are likely to demerge. Different parts of the company have no real impact on each other and fail to make each other more efficient.

Growth- firms can grow at different rates.
Diseconomies of scale if firm is too large

Resources- might be a lack of resources and so they might sell off apart.

Finance- selling off part of the firm can raise valuable finance.- can be invested into somewhere else.

Focussed companies: Some people believe if the company and the management are more focussed on individual markets they become more efficient and successful.

Question 26

Impact of demergers on businesses:

Answer 26

Firms can get ride of underperforming parts of the firm.
It allows the larger single firm to focus on core activities, may enable it to be more efficient.
Allows them to adapt to their unique markets.
However:
The smaller size of the business could lead to a loss of economies of scale.

Question 27

Impacts of demergers on workers:

Answer 27

their roles might be shifted between the demerged firm and the parent firm.
job cuts due to firms splitting apart.
- seperate firms may need their own managers and leaders so people could get a promotion.

Question 28

Impacts of demergers on consumers:

Answer 28

removal of diseconomies- lower prices to consumers.
if two firms in same industry demerge- increase choice for consumers.
innovation and efficiency could lead to better products and cheaper prices.
However:
- demerged firms may be less efficient through loss of economies of scale or raise prices.