3.1 business growth Flashcards
why might firms choose to grow?
-economies of scale which helps to decrease cost of production, will help sell more goods which will lead to increased revenue
-greater market share which gives them the ability to influence prices and restrict the ability of other firms to enter the market
-be able to build up assets and cash which can be used for financial difficulties and are more likely to sell a bigger range of goods in more than one local/ national market so are less affected by changes to individual products or places
why might firms choose to remain small?
-access to finance
-owner objectives and regulation
-the size of the market
-not all firms want to grow
the principal agent problem
where one group, the agent, makes decisions on behalf of the other group, the principal e.g owners want to reinvest profits whereas managers may want to increase their salary
private sector
the part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs
-almost all private sector organisations aim to maximise financial benefits for their shareholders
-some are not for profit to support their aim of maximising social welfare e.g charities
public sector
the part of the economy which is owned or controlled by local or central government
organic growth
where a firm grows by increasing their output and reinvesting its profits e.g LEGO introduced new products such as lego friends and board games to expand their customer base
advantages of organic growth
-less risk
-the firm is able to keep control over the business
disadvantages of organic growth
-slow way of growing especially for directors who want to maximise their salaries
-sometimes another firm has a market or asset which the company is unable to gain through organic growth
-difficult for firms to get new ideas
integration
growth through merger or takeover
vertical integration
the integration of firms in the same industry but at different stages in the production process e.g apple design their own hardware and software
advantages of forward and backward integration
-increased potential for profit as the firm takes the potential profit from a larger part of the chain of production
-less risks as suppliers do not have to worry about buyers not buying their goods and buyers don’t have to worry about suppliers not supplying the goods
-with backward integration, businesses can control the quality of supplies and ensure delivery is reliable
-forward integration secures retail outlets and can restrict access to these outlets for competitors
disadvantages of vertical integration
-firms have no expertise in the industry they took over, for example a car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa
horizontal integration
-firms in the same industry at the same stage if production integrate
advantages of horizontal integration
-helps reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets
-firms will be able to specialise and rationalise, reducing the areas of businesses which are duplicated
-business is able to grow in a market where it already has expertise
disadvantages of horizontal integration
-increase risk for the business if that particular market fails and they have nothing to fall back on after investing lots of money into that area
