3.1 Business Growth Flashcards
What are the reasons as to why a firm may want to grow?
- Experience EofS; decrease AC
- Higher sales/revenue
- Greater market share; reach monopoly power; influence market; increase profit
- Build assets; build security to help in financial difficulties.
- Sell larger variety of products; less affected by changes to product
Why may a firm choose to stay small?
No access to finance for expansion
Risk of failed investment
Focus on niche markets
- Small firms can specialise and provide unique products; builds loyal customer base
Prevents principle-agent problem
- Owners have some control over how firm operates; big firms can get complicated
What is the principle agent problem?
When there is a divorce of objectives between ownership and control.
What are the 2 differing aims of the owners and directors/managers?
Owners want to maximise return on investments; short run profit maximise
Directors/managers unlikely to want same thing; more to consider.
Who has more control in principle-agent problem?
Managers/directors have more information of how firm works; able to control flow of the information; creates information gap for owners
How could principal-agent problem be reduced?
Employees share ownership scheme
- Aligns interest of employees, managers and owners
Long term employment contracts for senior management
- Long term employees may take decision to benefit firm as whole instead of individual in long term
Long term stock commitment
- Senior management holding stocks incentivises management to make decisions to maintain profit & performance
Greater business Transparency with stockholders
- Better communication
What is the public sector?
The public sector is the part of the economy that is owned and controlled by government.
Why do countries decide to have a public sector?
To provide services; profit is not their aim.
What is the private sector?
The private sector is the part of the economy that is owned and run by individuals e.g PLCs and sole traders.
What are profit organisations?
Profit organisations are run to make profit and maximise financial benefits for shareholders.
What are non-profit organisations?
Non-profit organisations aim to maximise social welfare and help individuals and groups. e.g charities
What are the 2 types of business growth?
Organic growth and integration
What is organic growth?
Economic growth is where a firm grows by increasing their output e.g more investment; more labour; new stores
Advantages of organic growth
Sustainable development
- Expanding from internal resources and capabilities
Financially less risk
- Growth is financed by generated supernormal profits; allows firm to maintain financial stability and prevent excessive debt
Avoids DEoS
Good information
- Management understands the business; has more control
Disadvantages of organic growth
Slow pace of growth
- Growth occurs gradually; disadvantage in competitive markets
Only occurs if supernoraml profit is made
- Organic growth relies on reinvested profits
What is Vertical integration?
Vertical integration is strategy of expanding business operations across different stages of supply chain from production to distribution.
What is forward vertical integration?
When a firm merges with a firm closer to the distribution.
What is backward vertical integration?
When a firm merges with a firm closer to the supplier of raw materials.
Advantages of vertical integration
Increased potential for profit
- Firm takes potential profit from larger part of supply chain
Costs savings
- Eliminates need for transactions between different stages of supply chain
Improved control
- Firm has more control of other stages of supply chain; efficient communication; better information
Access to information
- Less information gap
Disadvantages of vertical integration
Increased costs
- Investment in other parts of supply chain; new facilities/tech/expertise.
Lack of expertise
- A firm may have less expertise managing another part of the supply chain; decreases efficiency
What is horizontal integration?
Horizontal integration is when firms in the same industry at the same stage of production integrate.
Advantages of horizontal integration
Increased Market share
- Firm increases market share by acquiring competitors
Reduced competition
- Less firm; companies have more control over market
Specialise
- More valuable expertise added to one firm; helps specialisation
Existing expertise
- Firms able to grow in an industry where expertise is present; likely to be more successful
Disadvantages of horizontal integration
Reduced competition
- Reduced no of competitors; higher consumer price; reduced innovation
Regulatory issues
- If firm becomes too big (monopoly/oligopoly); regulation may intervene
Risk of failure
- Integration can face unexpected challenges; can result in losses and setbacks
What is conglomerate integration?
Conglomerate integration is when a firm in different industries integrate.
Advantages of conglomerate integration
Reduced risk
- If one industry fails, firm can fall back onto other industry
Opportunity for growth
- Increased size and connections in new industries creates opportunities
Disadvantage of conglomerate integration
Lack of expertise
- New industry; new tech/products; less efficiency
Limited knowledge transfer
- New industry; less knowledge; more investment in training/skilled workers
Diseconomies of scale
What are the 4 constraints on business growth?
Size of market
- If consumer market is low, firms cannot increase output; not enough consumers to buy supply
Access to finance
- Harder for smaller firms to get loans; perceived as riskier than larger firms
Owner objectives
- Owner may not want their business to grow further; happy with current profits
Regulation
- Large firms often constrained by regulation to limit monopoly power
What is demerger?
Demerger is when a firm sells off at least one of the business; splits itself into separate parts to create 2+ firms.
Reasons for demergers
Reducing DEoS
- Decreasing size of firm to reduce costs/unit
Increased business focus
- Firm decides to narrow focus; easier/cheaper to maintain; more efficient
Increase liquidity
- Selling part of firm increases asset sales & increases share price
Remove loss-making parts
- Sell loss-making division to keep profits higher
Comply with regulation
- If firm is too big, regulation may force demerge
Impacts of demerger on firm
Narrow focus
- To increase efficiency and reduce costs; more innovation
Less principle agent problem
- More transparency between owners/management
Impact of demerger on employees
Promotions
- Separate firms need own managers and leaders; could lead to promotion
Job losses
- To make firm more cost efficient, jobs may be taken
Impacts of demerger on consumers
Lower prices/better quality
- Increased efficiency; lower prices; better quality
Eval: Only if it is a successful demerge
