3.1 Business Growth Flashcards
Why do firms grow?
Increase profit - firms may need to increase output to the point where mc=MR and they are maximising profits
Increase market share - as a firm expands it becomes more recognisable as a brand and is more easily distributed to consumers
EOS (bulk buying as firm grows) = lower AC
The larger the firm becomes, the more they can negotiate costs with suppliers = push comp out of market = firm becomes price maker = gains power
Diversify risk =expanding into diff markets
Managerial motives conflict with owners e.g prestige and higher salary
Disadv of growth
DEOS
High sunk costs e.g by staying small = less advertising expenditure to increase brand loyalty
Niche market = little room for expansion as market to purchase your goods may not exist
Opportunity cost since expanding business will mean less leisure time
The principal-agent problem
A situation of asymmetric information where an agent is expected to act in the best interest of a principal but the age t has different incentives to the principal, leading to a conflict of interests and the best outcomes not being achieved for the principle
How the principal agent problem occurs
A principal delegates an action to another individual but 1) the principal does not have full info about how the agent will behave and 2) the interests of the principal diverge from that of the agent, meaning that the outcome is less desirable than the principle expects.
Performance-Based pay
A way to over come PA problem by linking the agents compensation to their performance as it can motivate them to act in the principals best interest e.g managers could receive bonuses based on the company’s profitability or stock performance
Private sector
Businesses are operated and owned by private individuals and companies.
Private sector businesses are generally run for profit - to earn returns for the business owners e.g shareholders
Public sector
Businesses are owned and run on behalf of the public either by gov or by org which report to gov
Not run for profit generally but exist to provide g+s to public using public funds e.g Network rail (controlled by gov)
Much larger number of organisations provide goods and services which are owned by public bodies e.g NHS
Primary industry
Directly involve extracting raw materials from the earth e.g fishing and farming
Secondary industry
Involves changing raw materials into finished or part finished goods
Tertiary industry
Involve providing a service to the public e.g hairdressing
Organic growth
The internal growth of a business which builds on a business’ own capabilities and resources rather than growth through M&A
How to grow organically
Expansion into new markets
Developing new products
Increasing market share
Opening new stores
Adv of organic growth
Sustainable and controlled expansion
Lower financial risk as it relies on internal resources
Builds on existing strengths and expertise
Disadv of organic growth
Slower growth compared got other strategies
Limited in terms of rapid market capture
Requires time and patience to see substantial results
External growth
A company growing by acquiring another company (M&A)
Horizontal integration
A takeover of another business in the same industry at the same stage of production
Exp of horizontal integration
2019 - Walt Disney acquired 21st Century Fox’s entertainment assets (media and entertainment industry). Acquisition included film and tv studios and cable and International TV businesses
Adv of horizontal integration
Rapid increase of market share
Reduction in the cost per unit due to economies of scale
Reduces competition decreasing contestability
Existing knowledge of the industry means the merger is more likely to be successful
Disadv of horizontal integration
DEOS may occur as costs increase e.g unnecessary duplication of management roles
There can be culture clashes between the two merged firms
May be investigated by CMA
Vertical integration
Where a company expands its operations by acquiring or controlling other businesses that are either upstream or downstream in the supply chain
Supply chain
Supplier - Manufacturer - Distributor - Retailer - End consumer
Forward vertical integration
A business buys another business further upstream in the supply chain e.g a dairy farmer acquires an ice cream manufacturer
Backward vertical integration
A business merges or acquires an ice cream manufacturer e.g H&M purchasing a fabric manufacturer
Adv of vertical integration
Control of the supply chain which helps to reduce unit costs
Improved access to key raw materials perhaps at the expense of rivals who must then pay more from them
Reduces CoP leading to higher profits
Removes suppliers and takes market intelligence away from competitors which helps to make a market less contestable (increases a firms market power)
