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Y2 ECON > 3.1 business growth > Flashcards

3.1 business growth Flashcards

1
Q

give reasons why firms remain small

A
  • avoid diseconomies of scale
  • they operate in a niche market
  • owner’s objectives
  • lower costs of production
  • government regulation/legislation
  • increase shareholder value
  • provide personal service
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2
Q

give reasons why firms grow

A
  • gain more money
  • gain more market power
  • greater security
  • economies of scale
  • build up assets and cash
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3
Q

what is divorce of ownership from control

A

occurs because those who own the firm are often not the same people as those who control the business on a day to day basis - this can lead to a conflict of interest between thw two

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4
Q

difference between private and public sector

A

private - part of the economy that is owned and run by individuals or groups of individuals

public - part of the economy which is owned or controlled by local or central government

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5
Q

benefits of public sector

A
  • provides public goods
  • not affected by recession
  • helps reduce inequality in society
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6
Q

benefit of private sector

A
  • profit incentive to be efficient
  • entrepreneurs create jobs where needed
  • doesn’t require taxe to fund
  • less bureuacracy and scope for corruption
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7
Q

what do shareholders seek to maximise?

A

profits to maximise their dividends

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8
Q

what do managers seek to maximise?

A

sales and revenue, at the expense of profits

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9
Q

problems of divorce of ownership from control in large firms

A
  • In small firms, the owner is likely to run the business.
  • In larger firms, the owners appoint directors and managers to run the business
  • Therefore, in larger firms there is a divorce of ownership from control, this is an example of the principal-agent problem
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10
Q

what is the principal-agent problem?

A

occurs when one group, the agent, is making decisions on behalf of another group, the principal

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11
Q

explain how divorce of ownership from control leads to a principal-agent problem

A
  • The principal is the shareholder and the agent is the manager.
  • The shareholders of a firm often can’t see or control the day-to-day decisions of management (it’s costly)
  • As a result, they won’t know if the managers are working to build shareholder value
  • This lack of information is the principal-agent problem as the principal and agent have conflicting objectives
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12
Q

examples of how managers may put their own needs first rather than the shareholders

A
  • Award themselves large pay packages
  • Maximising size of company rather than profit to maximise bonus
  • May accept/reject a takeover based on the impact on themselves rather the impact on the shareholders
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13
Q

give ways a business can grow

A
  • organic growth
  • forward and backward vertical integration
  • horizontal integration
  • conglomerate integration
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14
Q

what is organic (internal) growth

A

where a firm grows by increasing their output e.g. through increased investment or an increased labour force

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15
Q

advantages

A
  • Very little risk, a firm can be fairly confident that sustained growth itself will not harm the company
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16
Q

disadvantages

A
  • organic growth is slow growth
  • It can be hard to internally gain knowledge about a product
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17
Q

explain (External) growth by mergers and takeovers

A

where a firm grows by joining with other firms usually by a merger or a takeover

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18
Q

vertical integration

A

A merger between two firms at different production stages in the same industry (different production states being something like a distributor buying up the raw material supplier).

Forward (vertical) integration

  • Where a supplier merges with one of its buyers (e.g. a car manufacturer buys a car dealership).

Backward(vertical) integration

  • Where a purchaser buys one of its suppliers e.g. a car manufacturer buys a tyre manufacturer.
19
Q

advantages of vertical integration

A
  • Potential cost savings by integrating supplier and buyer making them more efficient.
  • Can reduce risk by making the supply chain more under the control of the merged firm.
  • Forward vertical integration can give a firm more control over the market, giving it more price setting power and branding power
20
Q

disadvantages of vertical integration

A
  • Less expertise of the buying firm in the industry it is buying the other firm from
  • Firms can often pay too much for the firm they take over and share price ends up falling.
  • Difficulties in merging two firms in separate parts of the market, with costs of integration sometimes being greater than benefit of merger.
  • It is possible key workers in a taken over firm may leave, taking with them expertise that made the firm succeed initially.
21
Q

horizontal integration

A

A merger between two firms in the same industry at the same stage of production. Examples of these are Currys & PC World, Instagram and Facebook, EE

22
Q

advantages of horizontal integration

A
  • increased market control
  • Reductions in average costs due to economies of scale
  • Reducing competition by taking out competitor
  • High chance of transferable skills being used across the company if the companies work in the same industry.
23
Q

disadvantages of horizontal integration

A
  • internal diseconomies of scale
  • job losses - integration can be poorly managed and key workers leave
  • regulators will slow it down/possibly prevent it.
  • consumers can be disadvantaged by the lack of competition
24
Q

conglomerate integration

A

where two firms in different industries with no common connection/interest integrate (e.g. a tobacco manufacturer buying an insurance company)

25
Q

advantages of conglomerate integration

A
  • knowledge transfers
  • After initial purchase, risk is lowered because of diversification.
  • A conglomerate may find it easier to expand.
  • Successful managers can be transferred from company to company as needed.
  • Opportunity for asset stripping, where, for instance, a company is bought for its patents and knowledge, and then the rest of it sold off.
26
Q

disadvantages of conglomerate integration

A
  • High risk at initial setup because company is venturing into new area it knows little about - lack of expertise
  • diseconomies of scale
  • Again, firms often end up paying too much for the other firms they buy, and integration of the firms can be costly.
27
Q

Constraints on business growth

A
  • size of the market
  • Access to finance
  • owner objectives
  • regulations
28
Q

Constraints on business growth: Size of the market

A
  • Some markets are too small to allow for successful expansion.
  • This can especially be true in local markets but can also apply in national and international markets, for example the market for cricket balls is much smaller than the market for coffee.
29
Q

Constraints on business growth: Access to finance

A
  • Firms tend to grow through reinvesting profits and/or by taking out bank loans
  • If a small firm makes little profit or is seen as too risky to lend to by the banks, then it will struggle to have access to sufficient finance to expand
30
Q

Constraints on business growth: Owner objectives

A

Some owners are content with profit they are currently making and so feel no need to try and grow the business.

31
Q

Constraints on business growth: Regulation

A

For large companies, competition law can restrict firms from expanding e.g. a merger which takes a firm to a market share of over 25% must be reported to the Competition and Markets Authority (CMA)

32
Q

Factors to consider when considering pros and cons of merging

A
  • Bear in mind that risk and speed are the big types of pros and cons
  • Access to money. Organic growth does not require a lot of cash, whereas big merges require the borrowing of money
33
Q

what is a demerger

A
  • 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
34
Q

Reasons for Demergers

A
  • Lack of synergies
  • Growth
  • reduce the risk of diseconomies of scale
  • Focused companies
  • cultural differences/conflict of interest
35
Q

Lack of Synergies

A
  • A synergy is when creating a whole company is worth more than each company on its own
  • Without this, firms are likely to demerge because they will be worth more
36
Q

Growth

A
  • Each part of the firm could grow at different rates
  • The faster growing part might be separated
37
Q

Diseconomies of Scale

A

If the firm is so large that average costs rise with more output, the firm might choose to split

38
Q

Focused Companies

A

The firm might be able to grow faster if it focuses on a few markets, rather than several

39
Q

Resources

A

If a firm can no longer afford to invest the business, due to a lack of resources, they might sell off a part

40
Q

Finance

A

Selling off part of the firm can raise valuable finance, which could be better invested in a more profitable part of the firm

41
Q

Impact of Demergers on Workers

A
  • Workers might become confused, and their roles might be shifted between the demerged firm and the parent firm
  • There could also be job cuts
42
Q

Impact of Demergers on Businesses

A
  • Firms can dispose of underperforming or loss-making parts of the firm
  • It allows the firms to focus on their core activities
  • This allows them to adapt to their unique markets, whereas in a large firm, managers could find it hard to focus on each market
  • Firms eliminate diseconomies of scale, since they are better able to control and coordinate their business
  • The firm could make a profit by selling off a part of the firm
  • This can also be used as a source of finance, which will allow them to invest in other parts of the firm
43
Q

Impact of Demergers on Consumers

A
  • The removal of diseconomies of scale could lead to lower prices for consumers
  • There could be a net welfare gain if the demerger results in a higher level of efficiency
  • If two firms in the same industry and the same stage of production demerge, such as two airlines, this would increase choice for consumers

Y2 ECON (13 decks)

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