3.1 Business growth

Question 1

Why do firms choose to grow? (4)

Answer 1

1. To make greater revenue
2. To achieve economies of scale
3. To gain monopoly power + influence prices
4. To gain more security

Question 2

Why don’t all firms grow? (4)

Answer 2

1. The size of the market
2. Access to finance
3. Regulation
4. Owner objectives

Question 3

What is the ‘Principle-Agent problem’ ?

Answer 3

A conflict of interest between differing aims of 2 stakeholders, ie. a shareholder and the CEO

Question 4

How does the ‘Principle-Agent problem’ apply to firms and especially large firms? (2)

Answer 4

1. Owners want to maximise investment returns
2. Directors aim to maximise their own benefits

Question 5

What is the public sector?

Answer 5

Part of the economy which is owned or controlled by central or local government

Question 6

What is the private sector?

Answer 6

Part of the economy which is owned or run by individuals or a group of individuals

Question 7

What is a not-for-profit organisation?

Answer 7

An organisation which aims to maximise social welfare

Question 8

Methods of business growth: (4)

Answer 8

1. Organic growth
2. Forward or Backward vertical integration
3. Horizontal integration
4. Conglomerate integration

Question 9

What is organic growth?

Answer 9

Where the firm grows by increasing their output, by increasing investment or labour

Question 10

What is an advantage of organic growth?

Answer 10

The firm is able to maintain control of their business

Question 11

What are the disadvantages of organic growth?

Answer 11

1. Slower paced growth
2. Difficult to gain access to new markets
3. It is expensive