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A-Level Economics Edexcel > 3.1 Business Growth > Flashcards

3.1 Business Growth Flashcards

1
Q

Why do firms grow?

A
  • desire to run a large business& continually seek to grow it
  • desire for higher levels of profit
  • desire for stronger market power to increase profit
  • to reduce costs by benefiting from economies of scale
  • growth provides opportunities for diversification
  • larger first often have easier access to finance
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2
Q

Why do small firms exist?

A
  • offer more personalised service, focus on building relationships with their customers
  • unable to access finance for expansion
  • provide a product in a niche market
  • operate in mass markets with low barriers to entry
  • rapid growth cause diseconomies of scale which can be difficult to deal with
  • goal is profit satisficing
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3
Q

What is the divorce of ownership and control?

A
  • As firms grow owners appoint managers to run the business
  • there is a separation between owners and managers who control the day to day running of the business
  • this gives rise to the principal-agent problem
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4
Q

What are examples of the principal agent problem in divorce of ownership and control?

A
  • shareholders want to maximise there profits, workers want to maximise their salaries
  • shareholders want to maximise their profits, but managers may want to maximise the number of sales over the value of the sales
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5
Q

How is the principal agent problem caused?

A
  • by information gaps that the agents have a lot more information than the owners
  • often able to control the flow of information
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6
Q

How can the principles diminish the principal agent problem?

A
  • by granting share options to managers
  • if managers are shareholders, they will be likely to align their interests with those of the owners
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7
Q

What are public sector organisations?

A
  • owned and controlled by the government
  • their goal is not profit maximisation but to provide a service
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8
Q

What are private sectors organisations?

A
  • owned and controlled by private individuals
  • the goal of organisations is profit maximisations
  • causes private sector to be more efficient with higher levels of productivity
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9
Q

What are profit organisations?

A
  • most firms in the private sector exist to make a profit, even if their goal is not profit maximisation
  • if they don’t make profit they will go out of business
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10
Q

What are not-for-profit organisations?

A
  • exist to provide a service or meet a need
  • sell goods/ services and use profit to further objectives
  • exempted from paying direct taxation
  • all charities that are regulated by the UK charity Commission
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11
Q

How can businesses grow?

A
  • organically
  • externally
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12
Q

what is organic growth

A

growth driven by internal expansion using reinvested profits or loans

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13
Q

What is Inorganic/external growth?

A

growth as a result of mergers or takeovers

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14
Q

How is organic growth generated?

A
  • gaining greater market share
  • product diversification
  • opening a new store
  • international expansion
  • investing in new technology/production machinery
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15
Q

What are the different types of inorganic/external growth?

A
  • vertical integration
  • horizontal integration
  • conglomerate integration
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16
Q

What is vertical integration?

A

refers to a merger or takeover of another firm in the supply chain/ different stage of the production process
- can be split as forward or backwords

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17
Q

What is Horizontal integration?

A

A merger or takeover of a firm at the same stage of the production process
- e.g. an ice cream manufacturer buys another ice cream manufacturer

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18
Q

What is conglomerate integration?

A

merger/takeover of a firm in a completely different industry

19
Q

What is the vertical integration order?

A
  • supplier
  • manufacture
  • distributor
  • retailer
  • end consumer
20
Q

What are the advantages of Organic growth?

A
  • pace of growth is managaeable
  • less risky as the growth is financed by profits and there is expertise in the industry
  • avoids diseconomies of scale
  • management know and understand ev very part of the business
21
Q

What are the disadvantages of organic growth?

A
  • pace of growth can be slow and frustrating
  • not necessarily able to benefit from economies of scale
  • access to finance may be limited
22
Q

What are the advantages of vertical integration?

A
  • reduces costs of production
  • lowers costs increase competition
  • reduced risk as greater control of supply chain
  • quality of raw materials can be controlled
  • additional profit in forward as profits from next stage are assimilated
  • forward integration can increase brand visibility
23
Q

What are the disadvantages of of vertical integration?

A
  • diseconomies of scale occur as costs increase
  • culture clash may occur between two firms that merge
  • little expertise in running the new firm causing inefficiency
  • the price paid for the new firm may take a long time to recoup
24
Q

What are advantages od horizontal integration?

A
  • rapid increase of market share
  • reductions in the cost per unit. due to economies of scale
  • reduces competition
  • existing knowledge of the industry means the merger is more likely to be successful
  • firm may gain new knowledge or expertise
25
Q

What are the disadvantages of horizontal integration?

A
  • diseconomies of scale may occur as costs increase
  • can be a culture clash between the two firms that have merged
26
Q

What are the advantages of conglomerate integration?

A
  • reduces overall risk of business failure
  • increased size and connections in new industries, opening up oportionutiws for growth
  • parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate
27
Q

What are the disadvantages of conglomerate integration?

A
  • possible lack of expertise In new products/industries
  • diseconomies of scale can develop quickly
  • results in job losses
  • worker dissatisfaction due to unhappiness at the takeover reducing productivity
28
Q

What are the constraints on business growth?

A
  • the size of the market
  • access to finance
  • owner objectives
  • regulation
29
Q

How does the size of the market constrain business growth?

A
  • more niche the market the smaller the number of potential customers
  • thus unable to grow further once total potential customers are reached
  • only option to grow is by increasing market size, perhaps by expanding internationally
30
Q

How does access to finance constrain business growth?

A
  • harder to access loans as a small firm due to high risk
  • interest rates for the loans are higher
  • unable to grow as unable to finance the growth
31
Q

How does owner objectives constrain business growth?

A
  • owners grow a business to a point that provides a certain lifestyle or standard of living
  • not beyond
32
Q

How does regulation constrain business growth?

A
  • large firms are constrained by competition regulation to limit monopoly power
  • firms that sell desert goods find growth limited by gov policies such as age restrictions, minimum price & indirect taxes
33
Q

What is a demerger?

A
  • When a firm sells off at least one of the businesses it owns,
  • or splits itself into separate parts to create two or more firms
34
Q

What are the reasons for demergers?

A
  • reducing diseconomies
  • increased business focus
  • cultural differences
  • remove loss making divisions
  • increase liquidity & dividend payments
  • comply with the demands of the competition commission
35
Q

How is the reduction of diseconomies of scale a reason for demergers?

A
  • decreasing the size of the firm can reduce the diseconomies
  • lowering the cost per unit
  • increasing profitability
36
Q

How are increased business focus a reason for demergers

A
  • efforts and resources are scattered across a large number of firms/industries
  • can be hard to maintain focus and profitability.
  • narrowing the focus can improve profitability
37
Q

How are cultural differences a reason for demergers

A
  • most common reason for merger failure of mergers
  • sometimes these differences are irreconcilable
  • not worth the expense
38
Q

How is remove loss making a reason for mergers

A
  • can be more profitable to remove loss-making divisions
  • replace them with outsourcing
39
Q

How is an increased liquidity and dividend payments

A
  • demergers generate extra revenue for the firm in the year they occur
  • this may increase the profit and dividend payments
40
Q

How is complying with the demand of the competition commission a reason for mergers

A
  • firms are forced to emerge by the competition regulator due to concerns about the high level of market share
  • considered to be anti competitive and bad for consumers
41
Q

What are the positive impacts on firms

A
  • opportunity for a more narrow focus on the core business
  • removing loss-making portions of the business
  • increased efficiency and lower costs unit
  • increasing the annual profits for the year that the demerger occurred
  • removing some difficult cultural differences
42
Q

What are the impacts of demergers on employees

A
  • may lose jobs
  • reduced friction from cultural differences, helping to build better team dynamics
  • smaller workforce provides opportunity for promotion
  • less complication in daily tasks due to more narrow focus
43
Q

What are the impacts of demergers on consumers

A
  • if successful, better quality products & customer service
  • if successful, lower prices due to the firms new efficiences
  • if unsuccessful, a narrower product range & perhaps worse quality/customer service

A-Level Economics Edexcel (20 decks)

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