3.1 Business Growth Flashcards
What is the Principal Agent Problem?
When the owners and managers of a company have different aims causing problems
What is economies of scale?
Cost advantages that a firm can achieve as it increases its level of output
Reasons for a business to grow?
Access to capital - Bigger companies can raise capital to expand
Economies of scale - Larger companies can produce more units of a product at a lower cost per unit
Market demand - If a market has a high demand a company may grow to meet it
Reasons to stay small?
Managerial capacity - easier to control a smaller business
Market demand - A market with a limited demand may remain small
Government regulations - companies may remain small to avoid government regulations
Types of business growth:
Organic growth
Forward and backward vertical integration
Horizontal integration
Conglomerate integration
What is organic growth?
Process of a business expanding its operations internally, relying on its own resources and increasing sales and revenue gradually
Advantages and Disadvantages of organic growth
Adv:
Sustainable and controlled expansion
Lower financial risk
Builds on existing strengths
DisAdv:
Slower growth
Limited in terms of rapid market capture
Requires time
What is forward and backward vertical integration?
Vertical integration involves a company expanding its operations either upstream (backward) or downstream (forwards) in the supply chain
Backward means acquiring supplies
Forward involves acquiring distribution channels or retailers
Advantages and disadvantages of vertical integration
Adv:
Increased control over the supply chain
Cost efficiencies
Better coordination
DisAdv:
High upfront costs for acquisitions
Potential for increased risk
Regulatory scrutiny
What is horizontal intergration?
When a company acquires or merger with competitors or businesses in the same industry. Increasing market share
Advantages and disadvantages of horizontal integration
Adv:
Rapid market share expansion
Elimination of competitors
Potential for economies of scale
DisAdv:
Integration challenges
Regulatory hurdles
May divert managements attention from core operations
What is conglomerate integration?
Involves a company diversifying its operations by acquiring businesses in unrelated industries
Advantages and disadvantages of conglomerate integration
Adv:
Diversification of risk across different industries
Capitalizing on unrelated opportunities
Potential for higher returns in diverse markets
DisAdv:
Complexity in managing unrelated businesses
Limited synergies between diverse operation
Difficulty in achieving economies of scale
What are 5 constraints on business growth?
Size of the market
Access to finance
Competition
Environmental and social factors
Resource constraints
What is a de-merger?
When a firm decides to split into separate firms
What are 5 reasons for demergers?
Strategic focus
Value unlocking
Financial performance
Enhanced efficiency
Market pressure
What are the impacts of de-mergers on businesses?
Parent company: may experience a positive impact in terms of increased focus
Spun off entity: Have the opportunity to thrive independently, potentially attracting new investors
What are the impacts of de-mergers on workers?
Parent company: Uncertainty and possibly job cuts or new responsibilities and working conditions
Spun-off entity: May benefit from increased autonomy and focus of the new organization
What is predatory pricing?
Company lowers prices to force competitors out
Internal economies of scale
Cost advantages a firm can achieve as a result of its own growth and expansion
External economies of scale
Cost advantages that result from the growth and expansion of an entire industry
What are the 5 types of economies of scale?
Risk bearing
Technical
Managerial
Financial
Purchasing
What is abnormal profit (supernormal)?
Profit in excess of normal profit
What is marginal profit?
The increase in profits when one more unit is sold
What is profi maximisation?
Marginal cost = Marginal revenue
What is dynamic efficiency?
When you invest now for future benefits
