3.1 Business growth

Question 1

What is a firm?

Answer 1

An organisation whose function is to combine resources for the production and supply of goods and services.

Question 2

What are economies of scale?

Answer 2

Occur when an increase in the scale of production results in a fall in long-run average costs.

Question 3

Name 4 reasons why some firms remain small:

Answer 3

Size of the market is small - firms may operate in a specialist segment of a market where demand is low.

Limited access to finance - small firms may be regarded as high risk to banks, making them unwilling to lend.

Owner’s objective - owners may want to remain in complete control of their business and so be unwilling to expand.

Lack of economies of scale - there may be no incentive for firms to grow if there is no potential cost saving.

Question 4

Name 4 reasons why some firms grow:

Answer 4

To benefit from economies of scale - larger firms often have lower costs per unit of output in the long run.

To increase market share - a larger firm has more market power and can control prices and retain consumer loyalty. It also means the threat from competitors is reduced.

To reduce risk - larger firms may diversify and produce a range of products, so benefiting from economies of scope

To meet managerial objectives - firms may grow because the pay and bonuses of managers are related to sales revenue.

Question 5

What is the principal-agent problem?

Answer 5

When the aims of the principals (shareholders) and agents (directors and managers) diverge and conflict with each other.

Question 6

Give an example of the principal-agent problem:

Answer 6

Shareholders want to maximise profits (to maximise their dividends), whereas managers may take a long-term view and want to invest that money back into the firm.

Question 7

What do the main objectives of a firm depend on?

Answer 7

Whether the firm is in the private or public sector.

Question 8

What is the private sector?

Answer 8

Firms owned by private individuals or groups of private individuals. They usually aim to maximise profit.

Question 9

What is the public sector?

Answer 9

Firms owned by the government. They can survive without making a profit because the government can make up shortfall in revenue from taxation.

Question 10

What are the 4 main types of business growth?

Answer 10

Organic growth

Horizontal integration

Backward and forward vertical integration

Conglomerate integration

Question 11

What is organic growth?

Answer 11

Internal growth of a business through an increase in output and sales. This can be achieved by buying new capital, taking on more workers or increasing the number of hours people work.

Question 12

Name 3 advantages of organic growth:

Answer 12

Management has a good knowledge of the business.

No need for restructuring.

There is less risk than with growth through a merger.

Question 13

Name 3 disadvantages of organic growth:

Answer 13

Growth may be slower than through a takeover.

It may decrease the competitiveness of the business.

The firm may become too specialised, e.g. in areas that are becoming out of date.

Question 14

What is horizontal integration?

Answer 14

This is when firms merge at the same stage of the production process.

Question 15

What are 3 advantages of horizontal integration:

Answer 15

To gain economies of scale.

To increase market share.

Increased revenue for the business as a result of having a larger customer base.

Question 16

What are 3 disadvantages of horizontal integration:

Answer 16

Diseconomies of scale can occur.

There is risk involved in focusing on a narrow range of goods and services.

Some workers may lose their jobs if their roles are duplicated.

Question 17

What is backward vertical integration?

Answer 17

Occurs when a firm merges with a supplier.

Question 18

Name 3 advantages of backward vertical integration:

Answer 18

Control over raw materials means supply and quantity are guaranteed.

Other firms might be prevented from getting the supplies.

The mark-up a supplier makes can become profit for the firm.

Question 19

Name 3 disadvantages of backward vertical integration:

Answer 19

The firm may not need to buy all the supplies.

The firm may not have specialist knowledge - diseconomies of scale set in.

The firm may find it hard to adapt to changes in demand.

Question 20

What is forward vertical integration?

Answer 20

This is where a firm buys another firm in the same production process but closer to the customer.

Question 21

Name 3 advantages of forward vertical integration:

Answer 21

It might guarantee consumers can see a product at its best.

Consumers may not be distracted by competition from other products.

Market research is more effective, and the firm can adapt in response to consumer preference

Question 22

Name 3 disadvantages of forward vertical integration:

Answer 22

The firm on its own might not have a wide enough range or choice for consumers.

The firm might not have marketing and sales expertise.

Risk of losses if demand for a product falls.

Question 23

What is conglomerate integration?

Answer 23

Occurs when a firm buys another firm in a completely unrelated business.

Question 24

Name 3 advantages of conglomerate integration:

Answer 24

Risk is spread.

Different products do well at different parts of the business cycle.

Brands gain more recognition.

Question 25

Name 3 disadvantages of conglomerate integration:

Answer 25

Lack of expertise in new areas.

Brands might become diluted.

Different cultures may result in conflict and low productivity.

Question 26

Name 4 constraints on business growth:

Answer 26

Government regulation - regulation may be used to ensure markets remain competitive and prevent the development of monopolies.

Market constraints - if demand is limited or if individual tastes have to be satisfied, then large-scale production is inappropriate.

Vision constraints - the owner’s attitude may be a key reason for a firm not growing.

State of the economy - if the economy was in a recession, demand would likely be limited.

Question 27

Name 4 reasons for demergers:

Answer 27

To focus on the core business

Increase profit

To avoid diseconomies of scale

To meet the demands of regulations

Question 28

What is the impact of a demerger on businesses?

Answer 28

Can focus on the core business and raise funds from selling parts and removing loss making parts.

Question 29

What is the impact of a demerger on workers?

Answer 29

There will likely be an increase in job security if the loss-making parts of the business are demerged.

Question 30

What is the impact of a demerger on consumers?

Answer 30

Greater competition leads to lower prices. More focused businesses are able to better meet consumers needs.