3.1 Business Growth

Question 1

Why do firms grow

Answer 1

To make more money, to gain monopoly power, greater security

Question 2

Benefits a firm gets from growing and being a larger firm

Answer 2

• economies of scale, this will allow them to sell more goods and make more revenue
• greater share of the market, this will allow them to influence prices and restrict other firms entering
• hage more security as they will be able to build up assets and cash which can be used in financial difficulties

Question 3

Why do some businesses remain small

Answer 3

Because if contstraints on growth:
The size of the market
Access to finance
Owner objectives and regulation

(Not all firms want to grow)

Question 4

Who are some of the people in a firm that has separation of ownership and control

Answer 4

• Owned by shareholders, no part in running business
•Chief executive and senior managers, work for company and make day to day positions
• board of directors, oversee the way the business is run, can be voted off board

Question 5

Explain the differing aims of the two stakeholders

Answer 5

• the owners will want to maximise the returns on their investment so will want to short run profit maximise
• directors and managers are unlikely to want the same thing: as employees, they want to maximise their own benefits

Question 6

What is the principle agent problem

Answer 6

Where one group, the agent, makes decisions on behalf on another group, the principle. In theory, the agent should maximise the benefits of those they are looking after but in practice they have the temptation to maximise their own benefits

Leads to profit satisficing

Question 7

What is the private sector

Answer 7

Refers to that part of the economy that is owned and run by individuals or groups of individuals

Question 8

What is the public sector

Answer 8

Refers to that part of the economy which is owned or controlled by local or central government

Question 9

Outline the difference between profit and not for profit organisations

Answer 9

• almost all private sector organisations are run to make a profit and to maximise financial benefits for their shareholders
• some private sector firms are not for profit. This means that aim to maximise social welfare and help individuals and groups

Question 10

What is organic growth

firm example too

Answer 10

Where the firm grows by increasing their output, for example, increased investment or more labour. They may open new stores, increase their range of products. Almost all firm growth is organic

An example is LEGO, they introduced new products, such as LEGO friends and board games to expand

Question 11

What is integration

Answer 11

When businesses are brought together through a merger or takeover.

Question 12

Advantages of organic growth

Answer 12

• as integration id expensive, time-consuming and high risk, and firms paying too much for takeovers and integration, this shows a negative element of integration
Instead, with organic growth the firm is able to keep control over their business

Question 13

Disadvantages of organic growth

Answer 13

• sometimes another firm has a market or an asset which the company would be unable to 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 their new ideas.

Question 14

Better definition of integration

Answer 14

Integration is growth through amalgamation, merger or takeover. A merger or amalgamation is where one firm buys another.

Question 15

What is verticals integration

Example

Answer 15

The integration of firms in the same industry but at different stages in the production process.

Tescos takeover of booker in 2018.

Question 16

What is backwards integration

Answer 16

If a merger takes the firm back towards to supplier of a good, it is backwards integration

Question 17

What is forward integration

Answer 17

When the firm is moving towards the eventual consumer of a good

Question 18

Advantages of integration

Answer 18

• increased potential for profit
• less risks as suppliers do not have to worry about buyers no buying their goods
• with backward, businesses can control the quality of silliest and ensure delivered is reliable
• forward integration secures retail outlets and can restrict access to these outlets for competitors

Question 19

Disadvantages of integration

Answer 19

Firms may have no expertise in the industry they took over, for example, a car manufacturer company would have deep knowledge of car manufacturing but no knowledge of how to sell a car

Question 20

What is horizontal integration

Example

Answer 20

Where firms in the same industry at the same stage of production integrate

2015, AstraZeneca acquired ZS pharma

Question 21

Advantages of horizontal integration

Answer 21

• helps to reduce competition as a courier is taken out an increases market share
• firms will be able to specialise and rationalise
• business is already able to grow in a market where it has expertise

Question 22

Disadvantages of horizontal integration

Answer 22

Will increase risk for the business as if thay particular market fails, they have nothing to fall back on.

Question 23

What is conglomerate integration

Example

Answer 23

This is where firms in different inductees with no obvious connections integrate.

Today this is uncommon, but it was popular in 60’s and 70’s. General Electric was founded as a lighting business and is now involved in aircraft, water, oils and gas and more

Question 24

Advantages of conglomerate integration

Answer 24

• Useful for firms where there may be no room for growth in the present market
• range of products reduces risk for firms and if a whole industry fails, they will survive due to other parts of business
• make it easier for each individual part of the business to expand than if they were in their own finance

Question 25

Disadvantages of conglomerate integration

Answer 25

Going into markets which they have no expertise. Can often be damaging

Question 26

Constraints of business growth

Answer 26

• size of the market. Size is limited so not all are able to mass produce as all of it might not sell
• access to finance. If they do not make enough profits, they will not be able to use retained profits to grow
• owner objectives. Some owners may not want business to grow more
• regulation. gov introduce regulation to stop businesses from growing

Question 27

What is a demerger

Example

Answer 27

A business strategy in which a single business is broken into to two or more components, either to operate on their own, to be sold or to be dissolved

1997, Pepsi announced a demerger of its Pizza Hut, KFC, and Taco Bell restraints to focus on comp with Coca Cola

Question 28

Reasons for demergers

Answer 28

• lack of synergies - when different parts of the company have no real impact on eachother and fail to make the other more efficient
• value of company / share price - some emerge as the value of the separate companies is more than the company combined
• focussed companies - some belive if the managers are focussed on individual markets, they will perform better

Question 29

Impacts of demergers on workers

Answer 29

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 30

Impact of demergers on businesses

Answer 30

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 could lead to a loss of EofS

Question 31

Impact of demergers on consumers

Answer 31

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.