3.1 - business growth Flashcards
Why might firms grow?
- Profit maximising
- Increase market share
- Diversify and enjoy risk-bearing economies
- Create economies of scale
- Owners’ objectives
Why might firms stay small?
- Don’t have the finance to grow
- Regulations limiting growth
- Operate in niche markets
- Diseconomies of scale
- Profit satisficing
What is the principal-agent problem?
When the aims of the principals (shareholders who want to maximise profit) conflict with the aims of the agents (CEOs/managers who want to pursue their own goals).
Why might the divorce of ownership and control happen?
When firms get bigger, the CEO sells shares to shareholders who eventually gain majority ownership while the CEO retains control.
What is the difference between organic growth and inorganic/external growth?
Organic growth - when a firm invests in itself to increase output.
Inorganic growth - when a firm grows by acquiring or merging with another firm.
What are the 4 types of inorganic/external growth?
- Backwards vertical integration: a firm integrates with another firm further away from the consumer (closer to supplier).
- Forwards vertical integration: a firm integrates with another firm closer to the consumer.
- Horizontal integration: a firm integrates with another firm at the same stage of production.
- Conglomerate integration: a firm integrates with another firm in a completely unrelated business.
What are the advantages and disadvantages of organic growth?
Advantages: more likely to keep ownership and control of the firm, less risk as management has good knowledge of the business.
Disadvantages: still ways to lose ownership and control, slower growth.
What are the advantages and disadvantages of vertical integration?
Advantages: can control the supply chain so reduce competition, intermediary costs can be cut out (transport, markup) so profit increases, better access to raw materials and consumers so can control quality or receive consumer feedback directly.
Disadvantages: regulation may ban firms from vertically integrating it if it prevents competition, diseconomies of scale, the firm may lack expertise.
What are the advantages and disadvantages of horizontal integration?
Advantages: economies of scale, rationalisation (firms reorganise to avoid duplicated costs), less competition as firms are working together.
Disadvantages: diseconomies of scale, job losses, brand dilution if the firms’ brands are very different.
What are the advantages and disadvantages of conglomerate integration?
Advantages: risk-bearing economies, increased brand awareness, knowledge transfers increasing dynamic efficiency.
Disadvantages: diseconomies of scale, brand dilution, lack of expertise.
What are 3 reasons why demergers happen?
- To avoid diseconomies of scale
- Firms can specialise in their own goods/services, increasing profit
- To raise finance by selling one of its divisions and investing it
What is the impact of demergers on workers?
There will be less cultural conflict so workers will have increased job satisfaction, but they may have lower job security if one of the divisions is sold.
What is the impact of demergers on consumers?
Lower prices as firms can specialise and increase efficiency which reduces costs and prices, but if firms are demerged too small, it will reduce economies of scale which increases LRAC so firms have to increase prices.
