3.1 Business Growth Flashcards
What is the problem with divorce of ownership?
Principal-agent problem
Where the senior managers and chief executive (agents) make decisions for the shareholders (principal)
What is a chief executive officer (CEO)?
The highest-ranking executive in a company, responsible for overall management and decision-making
What is an executive?
A person with senior managerial responsibility in an organization, especially one involved in making key decisions and managing overall operations
What are the board of directors?
The board is responsible for overseeing the company’s management, including executives like the CEO
They could replace the CEO
sets broad strategic goals and ensures the company is managed in the best interests of shareholders or stakeholdersW
What’s the Annual General Meeting (AGM)
held once a year by a firm where shareholders and members have the power to make decisions
Could vote directors on the board on or off
What are the 2 types of growth?
Organic growth
External growth
- merger (amalgamation)
- takeover
What is organic growth?
Growth through its own operations
Refers to firms increasing their output
- through increased investment or increased labour force
What is external growth?
Growth of a company through mergers (amalgamation) or takeover rather than through internal operations
There’s different types of merging
What’s amalgamation ( a merger)?
Joining together of 2 or more firms under a shared ownership
The board of directors and shareholders agree to merge
There’s 3 types of merger:
- horizontal integration
- vertical integration
- conglomerate integration
What’s horizontal integration?
merger between 2 firms in same industry and at same stage of production
E.g 2 battery companies merging
What’s vertical integration?
merger between 2 firms in same industry at different stages of production
Theres 2 types:
Forward vertical integration:
- supplier merges with one of its buyers
- e.g car manufacturer merging a car dealership
Backward vertical integration:
- purchaser merging one of it’s suppliers
- e.g car manufacturer merging a tire company
What’s conglomerate integration?
Merger between 2 firms with no common interest
e.g tobacco company merging with insurance company
What is a takeover?
When one company buys another, whilst keeping its own directors in charge
- so not merging
There’s 2 types:
Amicable
- friendly
- directors agree a price with shareholders then recommends to accept price
Contested/ Hostile
- unfriendly
- directors recommend shareholders to reject bid
- leads to takeover battle
- the company buying needs to take over 50% of shares to take control
What are the reasons why profit maximising companies want to grow?
Economies of scale
More power to control markets
Less at risk
Divorce of ownership give directors/ senior managers higher salaries
What are advantages and disadvantages to organic growth?
Advantages:
- Associated with all sized firms, unlike mergers
- Low risk
- Much easier to take on more workers, rent more shops, buy more capital etc
Disadvantages:
- sometimes difficult or impossible in certain markets
What are advantages and disadvantages to vertical integration?
Advantages:
- may save costs having a supplier or buyer, improving efficiency
- may reduce risk
- forward integration allows more control in the market
Disadvantages:
- Buying an industry without much experience may lead to poorer performance
- firms often pay too much and share prices drop
- expensive
- key workers may leave due to poorly managed
What are advantages and disadvantages to horizontal integration?
Advantages:
- reduction in costs due to economies of scale
- may reduce competition as can’t compete
- can buy unique assets
- allows growth in a market with experience already
Disadvantages:
- firms often pay too much and share prices drop
- key workers may leave due to poorly managed
What are advantages and disadvantages to conglomerate integration?
Advantages:
- reduces risk by not being dependant on one market
- may be easier to expand
- could use asset stripping
Disadvantages:
- No experience within market
- won’t benefit workers, customers or local economies
What’s asset stripping?
Buying a company that’s undervalued and selling off it’s assets individually
Via conglomerate merging or takeover
What’s a limited company?
A company where the liability of the owners (shareholders) is limited to the amount they have invested in the company
So their personal assets are protected from the company’s debts and liabilities. Hence called ‘limited’
There are two main types of limited companies:
Private Limited Company (Ltd):
- Shares are not publicly traded, and ownership is typically limited to a small group of people.
Public Limited Company (PLC):
- Shares can be traded on a stock exchange, allowing for broader ownership.
What are synergies?
Synergies refer to the potential benefits that occur when two or more companies merge, resulting in greater efficiency, performance, or value than they could achieve independently.
Reasons for demergers
- Lack of synergies
- Value is less combined than both separate
- Companies decide to focus on separate parts
