3.1 Business Growth Flashcards
Why do firms grow?
- 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
Why do small firms exist?
- 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
What is the divorce of ownership and control?
- 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
What are examples of the principal agent problem in divorce of ownership and control?
- 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
How is the principal agent problem caused?
- by information gaps that the agents have a lot more information than the owners
- often able to control the flow of information
How can the principles diminish the principal agent problem?
- by granting share options to managers
- if managers are shareholders, they will be likely to align their interests with those of the owners
What are public sector organisations?
- owned and controlled by the government
- their goal is not profit maximisation but to provide a service
What are private sectors organisations?
- 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
What are profit organisations?
- 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
What are not-for-profit organisations?
- 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
How can businesses grow?
- organically
- externally
what is organic growth
growth driven by internal expansion using reinvested profits or loans
What is Inorganic/external growth?
growth as a result of mergers or takeovers
How is organic growth generated?
- gaining greater market share
- product diversification
- opening a new store
- international expansion
- investing in new technology/production machinery
What are the different types of inorganic/external growth?
- vertical integration
- horizontal integration
- conglomerate integration
What is vertical integration?
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
What is Horizontal integration?
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
What is conglomerate integration?
merger/takeover of a firm in a completely different industry
What is the vertical integration order?
- supplier
- manufacture
- distributor
- retailer
- end consumer
What are the advantages of Organic growth?
- 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
What are the disadvantages of organic growth?
- pace of growth can be slow and frustrating
- not necessarily able to benefit from economies of scale
- access to finance may be limited
What are the advantages of vertical integration?
- 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
What are the disadvantages of of vertical integration?
- 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
What are advantages od horizontal integration?
- 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
What are the disadvantages of horizontal integration?
- diseconomies of scale may occur as costs increase
- can be a culture clash between the two firms that have merged
What are the advantages of conglomerate integration?
- 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
What are the disadvantages of conglomerate integration?
- 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
What are the constraints on business growth?
- the size of the market
- access to finance
- owner objectives
- regulation
How does the size of the market constrain business growth?
- 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
How does access to finance constrain business growth?
- 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
How does owner objectives constrain business growth?
- owners grow a business to a point that provides a certain lifestyle or standard of living
- not beyond
How does regulation constrain business growth?
- 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
What is a demerger?
- 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
What are the reasons for demergers?
- reducing diseconomies
- increased business focus
- cultural differences
- remove loss making divisions
- increase liquidity & dividend payments
- comply with the demands of the competition commission
How is the reduction of diseconomies of scale a reason for demergers?
- decreasing the size of the firm can reduce the diseconomies
- lowering the cost per unit
- increasing profitability
How are increased business focus a reason for demergers
- 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
How are cultural differences a reason for demergers
- most common reason for merger failure of mergers
- sometimes these differences are irreconcilable
- not worth the expense
How is remove loss making a reason for mergers
- can be more profitable to remove loss-making divisions
- replace them with outsourcing
How is an increased liquidity and dividend payments
- demergers generate extra revenue for the firm in the year they occur
- this may increase the profit and dividend payments
How is complying with the demand of the competition commission a reason for mergers
- 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
What are the positive impacts on firms
- 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
What are the impacts of demergers on employees
- 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
What are the impacts of demergers on consumers
- 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
