3.1 Business growth Flashcards
How can you tell if a business has grown?
-A greater market share for the business.
-Higher sales and profits.
-A greater number of employees in the business.
-Business increases in value.
-Opens more offices, factories, premises etc.
-More people are aware of it.
Reasons for growth
-To increase future sales and profits
-To increase market
-To increase market power and influence
-Gaining Economies of Scale
-To protect against competition
-To reduce risk e.g. by diversification
Reasons to stay small
-Retain control. e.g. expansion may mean going on stock exchange
-Concentrate on niche markets. Small niche markets may have less competition and therefore be more profitable. Mass market may have more competition.
-Small can be a selling point. Some people prefer a local small coffee shop, rather than visiting a ‘bland’ multinational like Starbucks.
-Economies of scale are limited in some industries. e.g But, in some industries like coffee shops
-To avoid diseconomies of scale. -Optimum efficiency has been achieved.
-Not all firms aim at profit maximisation and sales maximisation
-Lack of motivation by the owner – leisure and stress!
-Barriers to entry imposed by larger firms already in the market e.g. technological, patents etc
What does Internal (organic) growth mean?
Business grows slowly increasing output then reinvesting its profits into itself.
What does External growth mean?
If a business grows quickly by Merger (joining with) or Takeover (buying) a competitor.
Internal growth characteristics
-Growth is slow
-Sensible and steady way to grow
-Likely to be beaten to the punch by quicker competitors
-No Debt so Low risk
External growth characteristics
-Quick way to grow
-Is expensive to do
-Involves getting into debt
-High risk
-Quick way to buy competitors customers
difference between merger and takeover
-Mergers are ALWAYS friendly.
-Takeovers can be FRIENDLY or HOSTILE. A lot depends on if the firm is a Ltd or Plc
what are the constraints on business growth
-Size of the market
-Access to finance
-Competition
-Owner Objectives
-Regulations e.g. Competition and Markets Authority, Government
Horizontal integration
Horizontal integration is when a firm merges with / takesover another firm in the same Industry at the same stage in production i.e. that makes the same
Ad of horizontal integration
-Economies of scale
-Lower LRAC (Long Run Average Costs)
-Increased market influence ( Power and Share)
-Reduction in Competition
-Economies of Scope (synergies)
-Reduction in some cost as duplication can be avoided e.g. only 1 marketing & finance department neded, shared distribution networks etc.
Dis of horizontal integration
-Costs
-Increased workload
-Increased responsibilities
-Anti-trust
-Legal issues / creating a monopoly
Vertical backwards integration
Vertical integration is when a firm merges with or buys another firm in the same Industry but further back in the Chain of Production.
ad of Vertical backwards integration
-Increased control.
-Guarantees sources of raw materials/component goods.
-Can’t be held to ransom by suppliers demanding a higher price at a critical time.
-Reduces competitors access to important markets and scares resources
-Increased profits due to improved cost control. Removal of the middle man mark up.
-A retailer is able to cater to the changing customer needs more rapidly if it owns the production or manufacturing firm that produces its products.
Dis of Vertical backwards integration
The process leads to lack of supplier competition that will lead to low efficiency resulting in potentially higher costs.
- increased capital requirements, reduced flexibility, and higher operating costs.
Vertical forward integration
Vertical integration is when a firm merges with or buys another firm in the same Industry but further forward in the Chain of Production.
Ad of Vertical forward integration
-Guaranteed outlet for products.
-The firm can exercise greater control over sales and prices of its products.
-The firm’s own retail stores serve as better source of customer feedback. –Thus the firm gets better control over quality
-The firm can improve its profits by reducing the costs of distribution and the costs of middlemen.
-Integration can ensure that handling and transportation costs are reduced.
Dis of Vertical forward integration
-Due to a lack of competition, product quality and efficiency may suffer
-Since its processes are interdependent, a slight interruption in one process may dislocate the entire production system.
-It is very difficult to efficiently manage an integrated firm because every business has its own structure, technology and problems.
Conglomerate Integration
A conglomerate has a large number of diversified businesses.
Another is Samsung – the electronics giant also makes military hardware, apartments, ships and a Korean amusement park!
This is when firms making completely different products merge, for example a Supermarket and a music Producer.
Ad of Conglomerate Integration
-Spreads risk – less vulnerable to losses in one area.
-Spreads ideas
-Cross subsidisation. E.g. a Supermarket acquires a music producer.
-The company may have excess cash but not enough opportunities to grow in its existing market.
Dis of Conglomerate Integration
-Company is taking over another company without having any experience about the industry and hence chances of mismanagement and overpricing the target company increase substantially.
-The company is shifting its focus from its core business to other business which in turn may result in the company performing poorly in both areas.
-It’s difficult to merge cultural value, employees and other things as compared to merger between companies which are working in the same industry
what is a De-merger
A de-merger happens when a firm decides to split into separate firms e.g. by spinning off / selling parts of their business.
Reason for demerger
-Focusing on core businesses to streamline costs and improve profit margins.
-Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, lower management costs.
-Raise money from asset sales and return to shareholders
-A defensive tactic to avoid the attention of the competition authorities who might be investigating possible monopoly power in an industry / market.
-Selling non-profitable parts of the business
Principal agent problem
-The principal agent problem is an asymmetric information problem. Owners of a firm often cannot observe directly the day-to-day decisions of management. The decisions and performance of agent are costly and difficult to monitor.
-Possible conflicts of interest that may result between shareholders (principal) and the management (agent) of a firm
