3.1 Business Growth Flashcards
Define and give examples of the public sector
Wholly or partly state owned
i.e. NHS, Railway lines, hospitals, schools
Define and give examples of the private sector
Owned by individuals, sole traders own the business or shareholders own the business according to their share allocation
i.e. Santander, M&S, Samsung
Define Shareholder
An individual or business who has purchased shares in a business. Is entitled to dividend and rights of how the company is run
Define Shareholder
Someone who owns a business
Shareholder motives (principle)
Ownership of the business
Increase their returns
Dividends
Define Dividends
A share of the profit in proportion to their ownership.
But firms have no legal requirements to pay dividends, they have to act in the best interest of the business (may choose to reinvest profits and shareholders don’t receive dividends)
Director motives (agent)
Revenue Maximisation
Increased sales volume
Profit satisfice
Define Sole trader
An individual who owns the business.
Unlimited Liability - meaning that personal assets are at risk.
Sole Trader advantages
- easy to set up
- complete control over decisions
- keeps all the profit (incentive)
- doesn’t need to publish info
- can react to local consumers’ changes in taste/preference
Sole trader disadvantages
- unlimited liability (assets at risk)
- difficult to raise capital to start or expand the B
- they have to work long, hard hours
- can’t benefit from EoS
Define Private Limited Company
A business owned by private investors (shareholders)
Shares aren’t on a PUBLIC stock exchange
Shareholders have limited liability
LTD advantages
LTD Disadvantages
Define Public Limited Company
A business owned by public investors (shareholders) and whose shares are traded on a public stock exchange.
Limited liability
PLC Advantages
PLC disadvantages
- required to publish detailed accounts and other financial information to the public. This information is expensive to produce and reveals details of the business to the public and competitors
- he cost of floating a business on the Stock Exchange is high and it is a long process
What is incorporated
When a business is formed as a company, it is given a separate legal identity
Define limited liability
Define the rights issue
When a listed company issues more shares in exchange for more investment
Principle Agent Problem - Divorce of ownership from control
one group (agent), makes decisions for the other group (principles)
The differing aims of different stakeholders causes problems
Shareholders want to maximise the return on their investment (maximise SR profit)
Managers, Executives, Employees want to maximise their own benefits (i.e. higher salary)
Reasons for business’ to grow
-Raise profits:
-Reduce costs: EoS = lower LRAC
-Minimise risk:Diversify the brand into different sectors with new product lines
-Increase market power:
-Managerial objectives: maximising sales, revenue, growth but not profit
Reasons for business’ to stay small
-Niche markets: bespoke market products is specialist and demand is low
-Avoid diseconomies of scale setting in
-Regualtions and interventions
-Owner objectives: remain in control
Define organic growth
firms grow from within over time by utilising their own resources as profits are retained and reinvested in the business. Companies such as Lego and John Lewis have pursued this strategy.
Define inorganic growth
A firm may be taken over, acquire another firm or merge with another firm. The firm may enter into a joint venture agreement also.
Advantages of Organic Growth
-Business grows at a steady and predictable rate
-Less risk, as it builds on the business’ existing strengths (ie - known customers)
-Can be financed through internal funds (retained profits) as growth is achieved in increments
Disadvantages of Organic growth
-Can be difficult to raise funds through retained profits and then potential to grow may be limited
-Franchises can be hard to manage effectively
-Slow growth may be achieved, shareholders may prefer more rapid growth to maximise their dividends
Define vertical integration
What are the 4 types of vertical integration
(car manufacturer example)
-Horizontal I: Firms are in the same industry and at the same stage of production (2 car manufacturers merge)
-Backawards I: A firm takes over a supplier (car manufacturer takes over windscreen supplier)
-Forwards VI: A firm takes over a customer (car manufacturer merges with sales dealership)
-Conglomerate I (diversification): I occurs between firms in unrelated industries (car manufacturer merges with bakery)
Advantages of vertical integration
Disadvantages of vertical integration
Define Horizontal Integration
The purchase of one firm by another firm at the same point in the supply chain, in either the same or different industries
Advantages of Horizontal integration
Removes threat of competition
Increases market share
Larger target market
Reduced risk of being bought out
Cost savigns through synergy
Disadvantages of Horizontal integration
X-inefficiency due to size of firm
Higher failure rate
Potential diseconomies of scale
Duplicated roles=redundancy
Duplication of assets= assets go unused or sold off for cheap
Supply chain
Is the pathway that a product passes through, from initial production, to manufacturing, retailing and to the counter.
How can mergers attract the CMA’s attention
