3.1 - Business Growth

Question 1

Why do some firms tend to remain small?

Answer 1

• Size of market
• Access to finance
• Owner objectives
• Regulation
• Personal preference (owner doesn’t want to grow)

Question 2

Why do some firms grow?

Answer 2

• Economies of scale
• Increase market share
• Build up assets and cash
• Sell a larger range of goods in more than one local/national market

Question 3

What is the principle agent problem?

Answer 3

Where one group, the agent, makes decisions on behalf of another group, the principal.

Question 4

What is the separation of ownership and control?

Answer 4

Firms are owned by their shareholders who play no part in the day to day running. The CEO and senior managers work for the company and control day to day decisions. Shareholders are represented by a board or directors.

Question 5

What are the problems caused due to the differing aims of the two stakeholders?

Answer 5

• The owners will want to maximise their ROI and so will want to short run profit maximise.
• Directors and managers, and employees will both want to maximise their own benefits.

Question 6

What is the public sector?

Answer 6

A part of the economy that is owned or controlled by local or central government.

Question 7

What is the private sector?

Answer 7

A part of the economy that is owned and run by individuals or groups of individuals.

Question 8

What is a profit organisation?

Answer 8

An organisation which is run to make a profit and maximise financial benefits for their shareholders.

Question 9

What is a not-for-profit organisation?

Answer 9

Any profit the organisation makes is used to support their aim of maximising social welfare and helping individuals and groups.

Question 10

What is organic growth?

Answer 10

Organic growth is where the firm grows by increasing their output, e.g. increased investment or more labour.

Question 11

What are the advantages of organic growth?

Answer 11

• It is a lot cheaper to grow organically than through integration.
• The firm is able to keep control over their business.

Question 12

What are the disadvantages of organic growth?

Answer 12

• Another firm may have a market or an asset that the company cannot gain through organic growth.
• Organic growth may be too slow for directors who wish to maximise their salaries.
• It will be more difficult for firms to get new ideas.

Question 13

What is vertical forward integration?

Answer 13

When a firm merges with or buys anther firm in the same industry but further forward in the chain of production.

Question 14

What are the benefits of vertical forward integration?

Answer 14

*Guaranteed outlet for products.
* The firm can exercise greater control over sales and prices of its products.
* The firm’s own retail stores serve as a better source of customer feedback. Thus the firm gets better control over quality.
* The firm can improve its profits by reducing the costs of distribution and the costs of middlemen.
*Integration can ensure that handling and transportation costs are reduced.

Question 15

What are the drawbacks of vertical forward integration?

Answer 15

• Since its processes are interdependent, a slight interruption in once process mat dislocate the entire production system.
• It is very difficult to efficiently manage an integrated firm because every business has its own structure, technology and problems.

Question 16

What is vertical backwards integration?

Answer 16

It is when a firm merges with or buys another firm in the same industry but further back in the chain of production.

Question 17

What are the benefits of vertical backwards integration?

Answer 17

• Increased control.
  *Guarantees sources of raw materials/component goods.
  *Can’t be held at ransom by suppliers demanding higher price at a critical time.
  *Reduces competitors access to important markets and scare resources.
  *Increased profits due to improved cost control, plus removal of the middle man mark-up.
• A retailer is able to cater to the changing customer needs more rapidly if it owns the production or manufacturing firm that produces its products.

Question 18

What are the drawbacks of vertical backwards integration?

Answer 18

• The process leads to a lack of supplier competition that will lead to low efficiency resulting in potentially higher costs.
• Firms may not have the expertise in the industry they take over or merge with.

Question 19

What is horizontal integration?

Answer 19

This is where firms in the same industry at the same stage of production integrate.

Question 20

What are the advantages of horizontal integration?

Answer 20

• Economies of scale
  *Lower long run aggregate costs
• Increased market influence (power and share)
• Reduction in competition
  *Reduction in some cost as duplication or certain departments can be avoided, e.g. only 1 marketing and finance dept. needed
• The business can grow in a market where it already has expertise

Question 21

What are the disadvantages of horizontal integration?

Answer 21

*Cost of integrating
* Increased workload
*Increased responsibilities
* Anti-trust
* Legal issues (monopoly, possible CMA investigation)
* Increased risk as if the market fails, the business won’t have a fall back

Question 22

What is conglomerate integration?

Answer 22

• Where firms in different industries with no obvious connections integrate.

Question 23

What are the advantages of conglomerate integration?

Answer 23

• Useful if there is no room for growth in the current market
  *Having a large range spreads risk
• Easier for each individual part of the business to expand than if they were on their own finance

Question 24

What are the disadvantages of conglomerate integration?

Answer 24

*Firms are going into markets in which they have no expertise and so can prove to be damaging for the business
*Unable to focus much on each business
* Difficult to merge cultural value, employees, and other things as compared to mergers between companies which are working in the same industry

Question 25

What are the constraints on business growth?

Answer 25

• Size of the market
• Access to finance
• Owner’s objectives
• Regulation

Question 26

How is the size of the market a constraint on business growth?

Answer 26

A market is limited to a certain size and so not all businesses are able to mass produce because their goods would not be bought by consumers.

Question 27

How is access to finance a constraint on business growth?

Answer 27

Firms use two main ways to finance growth: retained profits and loans. If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow.

Question 28

How is owner’s objectives a constraint on business growth?

Answer 28

Some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with growth.

Question 29

How is regulation a constraint on business growth?

Answer 29

In some markets, the government may introduce regulation which prevents businesses from growing.

Question 30

What are the reasons for demergers?

Answer 30

• Focus on core businesses to streamline costs and improve profit margins
• Reduce the risk of diseconomies of scale by reducing functions and costs
  *Raise money from asset sales and return to shareholders
• Avoid CMA attention
• Separate faster growing parts
• Lack of resources
• Sell off non-profit parts
• Lack of synergies (when creating a whole company is worth more than each company on its own)

Question 31

What is the impact of a demerger on businesses?

Answer 31

Concentrating on a smaller core business may enable it to be more efficient and concentration may lead to more innovation and surviving higher competition. However, the smaller size of the business could lead to a loss of economies of scale and reduce efficiency

Question 32

What is the impact of a demerger on workers?

Answer 32

Workers could gain or lose through a demerger. Separate firms may need their own managers and leaders so people could get a promotion. However, the goal of making the firm more efficient may result in job losses.

Question 33

What is the impact of a demerger on consumers?

Answer 33

Consumers could gain or lose. They may gain from innovation and efficiency, leading to better products and cheaper prices. However, emerged firms may be less efficient through loss of economies of scale or raise prices/reduce quality or range of goods as they become motivated by profits.