3.1 Business Growth Flashcards
What is a firm?
A business organisation that produces and sells goods and services with the aim of generating revenue and making profit
What are the 3 types of firms?
- Sole trader
- Partnership
- Public limited company (PLC)
What is a sole trader?
A self-employed person who owns and runs their own business as an individual
What is a partnership?
An arrangement by two or more parties to manage and operate a business and share its profits
What is a public limited company (PLC)?
A publicly traded business that is owned by shareholders and managed by directors
What are 2 alternatives to profit maximizing?
- Revenue maximization
- Sales maximization
Name 3 ways firms can increase profit
- Entering new geographical markets (international growth)
- Diversifying range of products sold
- Investing in new production methods and techniques
What are the 2 types of growth?
- Organic growth
- Inorganic growth
What is organic growth?
When firms expand internally using their retained profits
What is inorganic growth?
When firms expand externally through mergers or takeovers
What is vertical integration?
The merger of two firms in the same industry at different stages of production e.g a car manufacturer and a car dealership
What is horizontal integration?
The merger of two firms in the same industry at the same stage of production e.g two car manufacturers merging
What is conglomerate integration?
The process of merging or acquiring companies that operate in different industries or markets
What are the 2 types of vertical integration?
- Forward vertical integration: acquiring a business further up the supply chain
- Backward vertical integration: acquiring a business further down the supply chain
How can firms grow organically?
- Increased investment e.g opening up new stores
- Widening customer base e.g diversifying new or existing products
- Increasing output
What are economies of scale?
A cost advantage experienced by a firm when it increases its level of output (as output increases, cost per unit decreases)
What is a merger?
The combination of two separate businesses into a single new entity
What is a takeover?
A process where one business makes a successful bid to acquire control of another business
What is the principal agent problem?
A conflict in interests between a company’s owners and its managers who are delegated to make decisions on their behalf
What is the difference between the private and public sector?
- Private: part of economy owned and run by individuals or groups of individuals (e.g sole traders, PLC’s)
- Public: part of economy owned and controlled by central or local government
What are 2 advantage and 2 disadvantages of organic growth?
- Integration/mergers are expensive and time-consuming
- Firm is able to maintain control of their business
- Long-term, may be too slow for firms
- More difficult to expand into new markets
What are 2 advantages and a disadvantage of backward integration?
- Increased potential for profit as the firm takes the potential profit from a larger part of the chain of production
- With backward integration, businesses can control the quality of supplies and ensure delivery is reliable
- Firms may have no expertise in the industry they took over
What are 2 advantages and a disadvantage of horizontal integration?
- Reduces competition as a competitor is taken out and increases market share, giving firms more power to influence markets
- FIrms able to specialise and rationalise, reducing the areas of the businesses which are duplicated
- Increases risk for the business as if that particular market fails
What are 2 advantages and a disadvantage of conglomerate integration?
- The range of products reduces the risk for firms and if an industry fails, they will can survive due to the other parts of the business
- Useful for firms when there may be no room for growth in the present market
- Firms entering a market where they have no expertise, can be damaging
