3.1 Business Growth

Question 1

Reasons why firms grow

Answer 1

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

Question 2

Reasons why firms choose to stay small

Answer 2

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

Question 3

What is the Principal-Agent problem?

Answer 3

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

Question 4

What are public sector organisations

Answer 4

Organisations owned and controlled by the government
e.g. BBC

Question 5

What are private sector organisations?

Answer 5

Organisations owned and controlled by private individuals

Question 6

What are the two types of business growth

Answer 6

Organic and inorganic

Question 7

What is organic growth?

Answer 7

Growth driven by internal expansion using reinvested profits or loans
e.g. gaining greater market share or opening a new store

Question 8

What is inorganic growth?

Answer 8

Growth that occurs as a result of mergers or takeovers

Question 9

What are the 3 ways inorganic growth usually occurs

Answer 9

Vertical integration
Horizontal integration
Conglomerate integration

Question 10

What is vertical integration?

Answer 10

A merger or takeover of another firm in the supply chain at a different stage of the production process

Question 11

What is horizontal integration?

Answer 11

A merger or takeover of a firm at the same stage of the production process

Question 12

What is conglomerate integration?

Answer 12

A merger or takeover of firms in an entirely new industry

Question 13

What are the advantages of organic growth?

Answer 13

-Pace of growth is manageable
-Less risky
-Avoids diseconomies of scale

Question 14

What are the disadvantages of organic growth

Answer 14

-Pace of growth could be tooo slow and frustrating
-Potentially not able to benefit from economies of scale
-Access to finance may be limited

Question 15

What are the advantages of vertical integration

Answer 15

-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

Question 16

What are the disadvantages of vertical integration

Answer 16

-Diseconomies of scale occur
-There may be a culture clash between the two firms
-Little expertise in running the new firm results in inefficiencies

Question 17

What are the advantages of horizontal integration

Answer 17

-rapid increase of market share
-benefit from economies of scale
-reduces competition
-may gain new knowledge or expertise

Question 18

What are the disadvantages of horizontal integration

Answer 18

-Diseconomies of scale may occur as costs increase
-May be a culture clash between the two firms

Question 19

What are the advantages of conglomerate integration

Answer 19

-Reduces overall risk of business failure
-New opportunities for growth due to new connections in new industries

Question 20

What are the disadvantages of conglomerate integration

Answer 20

-Possible lack of expertise in new industry
-Diseconomies of scale can quickly develop
-Job losses?
-worker dissatisfaction due to the takeover can reduce productivity

Question 21

What are the constraints that may hold a business back from growing?

Answer 21

-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

Question 22

What is a demerger?

Answer 22

A demerger occurs when a firm sells off at least one of the businesses it owns or splits itself into seperate parts

Question 23

What are the reasons for demergers?

Answer 23

-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

Question 24

What- are the impacts of demergers on the firm?

Answer 24

-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

Question 25

What are the impacts of demergers on employees

Answer 25

-Some workers may lose their job
-Smaller workforce = opportunity for promotion
-less complication in daily tasks

Question 26

What are the impacts of demergers on consumers

Answer 26

-if successful better quality products and customer service
-if successful, lower prices due to the firms new efficiencies
-if unsuccessful, a narrower range or products and potentially worse quality or customer service