3.1 Business Growth

Question 1

What are 3 reasons why firms grow?

Answer 1

• To benefit from Economies of scale
• To hold larger market shares
• For increased security

Question 1

What are 4 reasons firms remain small? (constraints of growth)

Answer 1

• Size of the market (e.g., niche markets)
• Limited Access to finance (can’t get loans from banks if there is high risk; can’t grow if not enough retained profits are made)
• Owner’s objectives (undesired to grow)
• Regulation (rules from government)

Question 2

What is the Principle-Agent Problem?
- Therefore, what do a lot of firms look to do?

Answer 2

• Owners look to maximise profits and return on investments, whilst managers (agents) look to maximise their own benefits
• Therefore, many firms profit satisfice instead of profit maximise

Question 3

What are the 4 main types of business growth?

Answer 3

• Organic (Internal Growth)
• Vertical Integration
• Horizontal Integration
• Conglomerate Integration

Question 4

What is Organic Growth?

Answer 4

• Growth from an increase in output in the business

Question 5

What are 4 benefits of organic growth?

Answer 5

• Less risk than external growth (e.g., takeovers)
• Can be financed through internal funds (retained profits)
• Builds on the business’ strengths (brand loyalty, customers)
• Allows growth at a sensible rate

Question 6

What are 3 Drawbacks of Organic Growth?

Answer 6

• The growth achieved may be dependent on the market around it
• Slower Growth
• Harder to develop new ideas

Question 7

What is Vertical integration? And the 2 types.

Answer 7

• Growth through merger or takeover
• Forward integration: Towards the consumer of the good
• Backward: Towards the supplier of the good

Question 8

What are 4 advantages of Vertical Integration?

Answer 8

• Control of the supply chain (therefore reducing costs of raw materials)
• Improved access to raw materials
• Better control of retail outlets (e.g., shops)
• Removing suppliers from competitors (increasing market power)

Question 9

What is a drawback on vertical integration?

Answer 9

• Firms may have no expertise in the industry they took over (could lead to diseconomies of scale)

Question 10

What is horizontal integration?

Answer 10

• When firms merge in the same stage of the production process

Question 11

• What are 4 advantages of horizontal integration?

Answer 11

• Reduces competition (as a competitor is taken out and increases market share)
• Benefits from economies of scale
• Cuts costs from specialization and rationalisation (as duplicated jobs are cut)
• Easier to grow in the market (already has expertise)

Question 12

What are 2 disadvantages of horizontal integration?

Answer 12

• Risk if the market fails
• Diseconomies of scale (if there are clashes in management)

Question 13

What is conglomerate integration?

Answer 13

• When firms in completely different industries merge

Question 14

What are 3 advantages of conglomerate integration?

Answer 14

• Useful if there is no room for growth in the current market
• Reduces risk (if one market fails, there are still others)
• Easier to expand (each individual part can expand on its own)

Question 15

What is a disadvantage of conglomerate integration?

Answer 15

• Can be damaging if no expertise in other markets (diseconomies of scale)

Question 16

What is a Demerger?

Answer 16

• When businesses are broken down into 2 or more parts to be sold, operate on their own or be dissolved

Question 17

What are 3 reasons for a demerger?

Answer 17

• Lack of synergies (could lead to inefficiency and diseconomies of scale)
• Value of company/ Share prices (if one part can grow, but the rest if holding it back)
• Focussed companies (splitting apart can allow higher efficiency and management in that particular market)

Question 18

What are the impacts of demergers to Workers, Businesses and Consumers?

Answer 18

• Workers: Can gain promotions or be fired
• Businesses: More efficiency and innovation, but smaller firms may suffer from larger competition
  (Can also lose economies of scale)
• Consumers: Potentially better and cheaper products
  (or worse, more expensive products due to loss of economies of scale)