3.1 Business Growth Flashcards
why might firns wish to grow?
- more sales and profit
- increase in market profit
- diversifying enjoying risk bearing economies
- internal economies of scale
- owners objectives (success)
why may firms not want to expand?
- lack of finance
- regulations, to stop firms growing, ( stoping consumer exploitation)
- niche markets, can’t personalise
- internal diseconomies of scale
- profit satisficing
overall reasons why firms may want to grow/ stay small
what is the divorce of ownership and control?
when the managers/ directors of the form are differnrt form the owners of a firm (usually shareholders)
leads to th principle agent problem
what is the principle agent problem?
- when the agent pursus differnt objctives to the principle
- eg: managers (agent) look to maximise sales for sale bonuses while shareholders (principles) look to maximise profit
what are private sector firms?
firms owned by indidiviuals who wish to maximise profit or seek to raise awarness
what are the different types of firms?
- private firms
- public firms
what is organic and inorganic growth?
- organic growth: firm grows by investing money into itself to increase output
- inorganic growth: when firms grow by merging or acquiring with another firm
what are the 4 types of inorganic growth?
- backward vertical integration
- forwards vertical integration
- horizontal integration
- conglomerate integration
what is vertical integration?
when firms from different stages of the same production process join together
eg:
what is backwards vertical integration?
a firm integrates with another firm away from the consumer (finished product) in the same production process
eg: ford manufacturing merging with tyre makers
what is forwards vertical integration?
when a firm integrates with another firm who is closer to the consumer in the same production process
eg: ford manufacturing merging with showrooms
what is horizontal integration?
when firms in the same stage of the production process merge together
eg: ford manufacturing and jaguar manufacturning
what is conglomerate ?
when two firms in unrelated industries join together
eg: pepsi and quakers
what are the pros of organic growth?
- keeping ownership and control (bank loans/ reinvesting profits)
- low risk (sucessful business model)
what are the cons of organic growth?
- loosing ownerhsip (if selling shares)
- loosing control (if setting up many franchises)
- slower growth
what are the pros of vertical integration?
- control of the supply chain, preventing competition
- reduced intermediary costs (transport costs/ markups)
- better access to consumers/ raw materials, more information, can improve quality/ develop more suitd products
what is the cons of vertical integration?
- regualtion preventing control of the supply chain
- costs of diseconomies of scales
- cost of acquisition
- may lack expertise
overall pros and cons of vertical integration
pros of horizontal integration
- internal economies of scale (purchaisng, finanical, tcehnical, managerial, marketing)
- rationalisation: reorganising and cutting out duplicate costs (
- reduced competition (no more adverts and discounts)
link back to profit
overall pros and cons of horizontal integration
cons of horizontal integration
- internal diseconomies of scale (abc- managment styles can clash slowing down communication)
- job losses
- brand dillution
link back to profit
what are the pros of conglomerate integration?
- internal economies of scale (risk bearing, reduced cost of failure)
- increased brand awarness, more sales for both
- knowledge transfers, increasing dyanimc efficency
cons of conglomerate intergration?
- internal diseconomies of scale (abc, communicationdue to managment issues)
- brand dillution ( quakers and pepsi- quakers no longer seen as healthy)
- lack of exepertise
overall pros and cons of conglomerate integration
reasons for demergers
- reduced ineternal diseconomies of scale
- specilaise and increase productivity and quality, increased output, decreasd costs, decreased LRAC costs, increasing profits
- cultural differences, avoiding conflicts
- asset sales to raise capital, can reinvest to economy increasing dynamic efficency
what are the pros and cons of demergers to workers
- pro: reduced cultural conflicts, reduced tension, increased productivity and job satisfaction
- con: lower job security: unsure of which division they will b under and if this particular division is sold to raise capital, may reduce their jobs entirley
what are the pros and cosn of demergers to consumers?
- pros: speclisation/ reduced diseconomies of scale, more efficent gives lower prices and better quality
- cons/ eval: firms become smaller, reduces the economies of scale : increasing costs and prices for consumers
