3.1 Business Growth Flashcards
Principal agent problem
When there is a conflict in priorities between the owner of an asset and the person to whom control of the asset has been delegated
Reasons why some firms remain small
- Retain control
- A unique point in a niche market
- less pressure
- less stress
- lack of experience
- keep a high standard
Reasons why firms stay big
- economies of scale
- more revenue, larger profit
- influence prices, restrict the ability of other firms to enter the market
- build up assets and cash
- bigger range of goods in more than one local/national market.
This separation causes problems due to the differing aims of the two stakeholders:
- short run profit maximisation
- maximised their own benefits
Public sector
refers to that part of the economy which is owned or controlled by local or central government. 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.
Private
refers to that part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs
how is the private sector divided up?
Profit and Non-Profit Organisations
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.
Non-Profit organisation
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.
Two main types of growth
- internal growth
- integration
Organic growth
where the firm grows by increasing their output, for example increased investment ormore labour. They may open new stores, increase their range of products etc. Almost all growth of firms is organic.
Organic Growth advantages
- Less expensive, time-consuming and high risk
- keep control
Organic growth disadvantages
- market or an asset from another firm, whcih the company would be unable to gain
- too slow
- lack of new ideas
Integration
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.
Backwards integration
If the merger takes the firm back towards the supplier of a good.
Forward integration
when the firm is moving towards the eventual consumer of a good.
Vertical integration advantages:
- increased potential for profit
- less risk
- control the quality of supplies - ensure delivery is relaible
- keep costs low
- retial outlets
Vertical integration disadvantages
- no expertise in industry taken over
Horizontal integration
firms in the same industry at the same stage of production integrate
Horizontal integration advanatges
- reduce competition
- increases market share
- specialise and rationalise
- already has expertise
Horizontal integration disadvantages
- increased risk
Conglomerate integration:
firms in different industries with no obvious connections integrate.
Conglomerate integration advantages
- no room for growth in current market
- reduces the risk
- easier for each individual part of the business to expand
Conglomerate integration disadvantages
- no expertise
- can be damaging to the business
Constraints of business growth:
- size of the market
- access to finance
- owner objectives
- regulation
Size of the market
- 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.
Access to finance
- 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.
Owner Objectives
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.
Regulation
In some markets, the government may introduce regulation which
prevents businesses from growing.
Reasons for demergers
- lacks of synergies
- value of the share price
- focusses companies
- want to avoid attention from competition authorities
Lack of synergies
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.
Value of the company/share price
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.
Focussed companies
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.
Impacts of demergers on workers
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.
Impacts of demergers on workers businesses
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.
Impacts of demergers on consumers
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.
