3.1 Business Growth Flashcards
What are 3 reasons why firms grow?
- To benefit from Economies of scale
- To hold larger market shares
- For increased security
What are 4 reasons firms remain small? (constraints of growth)
- 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)
What is the Principle-Agent Problem?
- Therefore, what do a lot of firms look to do?
- 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
What are the 4 main types of business growth?
- Organic (Internal Growth)
- Vertical Integration
- Horizontal Integration
- Conglomerate Integration
What is Organic Growth?
- Growth from an increase in output in the business
What are 4 benefits of organic growth?
- 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
What are 3 Drawbacks of Organic Growth?
- The growth achieved may be dependent on the market around it
- Slower Growth
- Harder to develop new ideas
What is Vertical integration? And the 2 types.
- Growth through merger or takeover
- Forward integration: Towards the consumer of the good
- Backward: Towards the supplier of the good
What are 4 advantages of Vertical Integration?
- 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)
What is a drawback on vertical integration?
- Firms may have no expertise in the industry they took over (could lead to diseconomies of scale)
What is horizontal integration?
- When firms merge in the same stage of the production process
- What are 4 advantages of horizontal integration?
- 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)
What are 2 disadvantages of horizontal integration?
- Risk if the market fails
- Diseconomies of scale (if there are clashes in management)
What is conglomerate integration?
- When firms in completely different industries merge
What are 3 advantages of conglomerate integration?
- 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)
What is a disadvantage of conglomerate integration?
- Can be damaging if no expertise in other markets (diseconomies of scale)
What is a Demerger?
- When businesses are broken down into 2 or more parts to be sold, operate on their own or be dissolved
What are 3 reasons for a demerger?
- 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)
What are the impacts of demergers to Workers, Businesses and Consumers?
- 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)
