3.1 Business Growth

Question 1

what are some reasons why some firms grow

Answer 1

● By growing, a firm will be able to experience ​economies of scale which helps them to decrease their costs of production. They will also be able to sell more goods and therefore make more revenue​. Together, these will help a firm to make a ​larger profit​: and many firms are motivated by profit.

● A larger firm will hold a greater share of their market. This will give them the ability to influence prices and ​restrict the ability of other firms to enter the market, helping them to make profits in the long run. Monopoly power often means firms have monopsony power​, and so will be able to reduce their costs by driving down the prices of their raw materials.

● A larger firm will have more security as they will be able to ​build up assets and cash ​which can be used in financial difficulties. Moreover, they are likely to sell a bigger range of goods in more than one local/national market and so they will be less affected by changes to individual products or places.

Question 2

what are reasosn why some firms tend to remain small

Answer 2

• The principal agnet problem
• Public and private sector
• profit and not-for-profit organisations

Question 3

what is the principal agent problem

Answer 3

In many large firms there is separtion of leadership and control, this separation causes problems due to the differing aims of the two stakeholders

● The owners will 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: as employees, they will want to ​maximise their own benefits

Question 4

what is the public and private sector problem

Answer 4

In the UK, the economy is split into private and public sector:

● The private sector refers to that part of the economy that is ​owned and run by individuals or groups of individuals,​ including sole traders and PLCs.

● The public sector refers to that part of the economy which is owned or controlled by local or central governmen​t. The purpose of these organisations is to provide a service for UK citizens and profit making is not their main aim, some may even make a loss which is funded for by the taxpayer.

Question 5

what is the problem with profit and non profit organisations

Answer 5

The private sector can be split into for profit and not-for-profit organisations:

● Almost all private sector organisations are run to make a profit and to ​maximise the financial benefits for their shareholders​. They may not necessarily profit-maximise, but their long term goal is to make money.

● Some private sector organisations are not-for-profit. Any profit they do make is used to support their aim of ​maximising social welfare and helping individuals and groups​. These organisations include charities and smaller organisations who aren’t large enough to be classified as charities.

Question 6

what are the two types of business growth

Answer 6

Organic growth and intergartion

Question 7

what is organic growth

Answer 7

This is where the firm grows by ​increasing their output​, for example increased investment or more labour

Question 8

what are some advantages of organic growth

Answer 8

● Integration is ​expensive, time-consuming and high risk​, with evidence suggesting that the long-term share price of the company falls following integration. Firms often pay too much for takeovers and integration is often poorly managed with many key workers tending to leave after the change.
● The firm is able to ​keep control ​over their business.

Question 9

what are disadvantages of organic growth

Answer 9

● Sometimes another firm has a ​market or an asset which the company would be unable to gain through organic growth. For example, integration would allow a European company to expand into the Asian market which it has no expertise in.
● Organic growth may be ​too slow​ for directors who wish to maximise their salaries.
● It will be more difficult for firms to get ​new ideas.

Question 10

what is integration

Answer 10

Integration is growth through amalgamation, merger or takeover. A merger or amalgamation is where two or more firms join under common ownership whilst a takeover is when one firm buys another.

Question 11

what are the types of intergration

Answer 11

• vertical integration : foward/backwards
• Horixontal integration
• conglomerate intergration

Question 12

what is vertical integration

Answer 12

the integration of firms in the ​same industry but at different stages in the production process​.

Question 13

what is backwards vertical integration

Answer 13

If the merger takes the firm back towards the supplier of a good, it is ​backwards integration​.

Question 14

what is forward vertical integration

Answer 14

​Forward integration is when the firm is moving towards the eventual consumer of a good.

Question 15

what are advantages of vertical integration

Answer 15

● There is increased potential for profit ​as the firm takes the potential profit from a
larger part of the chain of production.
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 ● There will be less risks as suppliers do not have to worry about buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods. ● With backward integration, businesses can ​control the quality of supplies and ensure delivery is reliable​. Moreover, they don’t have to worry about being charged high prices for supplies, keeping ​costs low and allowing lower prices for consumers. This can increase competitiveness and sales. ● Forward integration secures ​retail outlets and can restrict access to these outlets for competitors.

Question 16

what are disadvantages of vertical integration

Answer 16

● Firms may have ​no expertise in the industry they took over, for example a car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa.

Question 17

what is horizonatl integration

Answer 17

This is where ​firms in the same industry at the same stage of production integrate​.

Question 18

what are advantages of horizontal integration

Answer 18

● This helps to ​reduce competition as a competitor is taken out and ​increases market share​, giving firms more power to influence markets.
● Firms will be able to ​specialise and rationalise​, reducing the areas of the businesses which are duplicated.
● The business is able to grow in a market where it ​already has expertise​, which is more likely to make the merger successful.

Question 19

what are the disadvantages of horizontal integration

Answer 19

● The problem is that it will ​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. They are ‘placing all their eggs in one basket’.

Question 20

what is conglomerate integation

Answer 20

This is where ​firms in different industries with no obvious connections ​integrate​. They
can sometimes be linked by common raw materials/technology/outlets.

Question 21

what are advantages of conglomerate integration

Answer 21

● It is useful for firms where there may be ​no room for growth in the present market​.
● The range of products ​reduces the risk ​for firms and if a whole industry fails, they
will still survive due to the other parts of the business.
● It will make it ​easier for each individual part ​of the business to expand than if they
were on their own as finance can be easily obtained and managers can be transferred from company to company within the firm.

Question 22

what are some disadvantegs of conglomerate integration

Answer 22

● The problem with this is that firms are going into markets in which they have ​no
expertise​. It can often be ​damaging​ for the business.

Question 23

what are contrainsts of business growth

Answer 23

• size fo the market
• access to finance
• owner objectives
• regulation

Question 24

how does the size of the market contrain buissness growth

Answer 24

A market is limited to a certain size and so not all businesses are able to mass produce because their goods would not be bought by consumers. This can happen no matter how big the market is, and there will always be limits on growth. In particular, niche markets (specific products that few people want) and markets for luxury items or restricted prestige markets make it difficult for businesses to grow.

Question 25

how does access to ficace contrain business growth

Answer 25

Firms use two main ways to finance growth: retained profits and loans. If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow. Banks may be unwilling to lend firms money, particularly smaller businesses that they see as high risk. As a result, firms will be unable to grow as they can’t finance it.

Question 26

how do owner objectives contrain business growth

Answer 26

Some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with growth.

Question 27

how do regulations contrain business growth

Answer 27

In some markets, the government may introduce regulation which prevents businesses from growing.

Question 28

what is a demerger

Answer 28

A demerger is a business strategy in which a ​single business is broken into two or more
components​, either to operate on their own, to be sold or to be dissolved.

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Question 29

what are some reasons for a demerger

Answer 29

• lack of synergies
• value of the compay/share price
• focussed compaines
• competition authorities

Question 30

why may a lack of synergies lead to a demerger

Answer 30

This is when the different parts of the company have no real impact on each other and fail to make each other more efficient. Lack of synergy means managers are splitting their time between areas which are so different it could lead to diseconomies of scale; firms may split in order to avoid these diseconomies.

Question 31

why may the value of the company share price cause a demerger

Answer 31

Some companies demerge because the value of the separate parts of the company is worth more than the company combined. This is because some parts of the business are operating well and have potential to grow but the overall value is brought down because of the lack of success or lack of potential for growth of other parts of the business. Financial markets talk about ‘creating value’ by splitting up companies like this.

Question 32

why may focussed companies lead to a demerger

Answer 32

Some people believe if the company and the management are more focussed on individual markets they become more efficient and successful, and make higher profits. Management have limited time and skills and there are unable to spend the required time to make all areas of a huge diverse business successful. By focusing on one area, managers can improve their skills and knowledge and become more successful.

Question 33

what are the impacts of demerges on workers

Answer 33

Workers could gain or lose through a demerger. Separate firms may need their own managers and leaders so people could get a ​promotion​. However, the goal of making the firm more efficient may result in ​job losses

Question 34

what is the impact on businesses of a demerger

Answer 34

Concentrating on a smaller core business may enable it to be more efficient and concentration may lead to more ​innovation and surviving higher competition. However, the smaller size of the business could lead to a ​loss of economies of scale ​and reduce efficiency.

Question 35

what is the impact of consuemers of a demerger

Answer 35

Again, consumers could gain or lose. They may gain from innovation and efficiency, leading to ​better products and cheaper prices​. However, demerged firms may be less efficient through loss of economies of scale or ​raise prices/reduce quality or range of goods ​as they become motivated by profits.