3.1 Business Growth Flashcards
Reasons why firms grow
Owners/shareholders/manager desire to run a large business
Owners/shareholder desire for higher levels of profit
Desire for stronger market power
Reduce costs by benefitting from economies of scale
Easier access to finance
Reasons why firms choose to stay small
Offer a more personalised service
Unable to access finance for expansion
Provide a product in a niche market with a smaller market size
Many small firms operate in mass markets with low barriers to entry
Rapid growth can cause diseconomies of scale
Owners goal is not profit maximization but rather profit satisficing
What is the Principal-Agent problem?
When one group (the agent) makes decisions on behalf of another group (the principal), often placing their priorities above the principals
e.g. shareholders want to maximise their profits whilst workers want to maximise their salaries
What are public sector organisations
Organisations owned and controlled by the government
e.g. BBC
What are private sector organisations?
Organisations owned and controlled by private individuals
What are the two types of business growth
Organic and inorganic
What is organic growth?
Growth driven by internal expansion using reinvested profits or loans
e.g. gaining greater market share or opening a new store
What is inorganic growth?
Growth that occurs as a result of mergers or takeovers
What are the 3 ways inorganic growth usually occurs
Vertical integration
Horizontal integration
Conglomerate integration
What is vertical integration?
A merger or takeover of another firm in the supply chain at a different stage of the production process
What is horizontal integration?
A merger or takeover of a firm at the same stage of the production process
What is conglomerate integration?
A merger or takeover of firms in an entirely new industry
What are the advantages of organic growth?
-Pace of growth is manageable
-Less risky
-Avoids diseconomies of scale
What are the disadvantages of organic growth
-Pace of growth could be tooo slow and frustrating
-Potentially not able to benefit from economies of scale
-Access to finance may be limited
What are the advantages of vertical integration
-Reduces the cost of production (middle man profits are eliminated
-Lower costs make the firm more competitive
-greater control over the supply chain reduces risk
-can increase brand visibility
What are the disadvantages of vertical integration
-Diseconomies of scale occur
-There may be a culture clash between the two firms
-Little expertise in running the new firm results in inefficiencies
What are the advantages of horizontal integration
-rapid increase of market share
-benefit from economies of scale
-reduces competition
-may gain new knowledge or expertise
What are the disadvantages of horizontal integration
-Diseconomies of scale may occur as costs increase
-May be a culture clash between the two firms
What are the advantages of conglomerate integration
-Reduces overall risk of business failure
-New opportunities for growth due to new connections in new industries
What are the disadvantages of conglomerate integration
-Possible lack of expertise in new industry
-Diseconomies of scale can quickly develop
-Job losses?
-worker dissatisfaction due to the takeover can reduce productivity
What are the constraints that may hold a business back from growing?
-The size of the market. less customers in the market= -less potential sales
-Hard to access finance
-Owner objectives- profit satisficing> profit maximising
-Regulation. large firms are constrained by regulation that aims to limit monopoly power
What is a demerger?
A demerger occurs when a firm sells off at least one of the businesses it owns or splits itself into seperate parts
What are the reasons for demergers?
-Reducing diseconomies of scale
-increased business focus - resources are no longer spread across a large number of firms
-cultural differences
-remove loss making divisions
-increase liquidity and dividend payments - demergers generate extra revenue the year they occur
-comply with the demands of the competition commission - some firms may be forced due to the high level of market share
What- are the impacts of demergers on the firm?
-opportunity for a more narrow focus on the core business
-removing loss making portion of the business
-increased efficiency and lower costs/unit
-Increasing annual profits for the year the demerger occurred
-removing cultural differences
