3.1 Business Growth Flashcards
Why do firms grow
To make more money, to gain monopoly power, greater security
Benefits a firm gets from growing and being a larger firm
• 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
Why do some businesses remain small
Because if contstraints on growth:
The size of the market
Access to finance
Owner objectives and regulation
(Not all firms want to grow)
Who are some of the people in a firm that has separation of ownership and control
• 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
Explain the differing aims of the two stakeholders
• 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
What is the principle agent problem
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
What is the private sector
Refers to that part of the economy that is owned and run by individuals or groups of individuals
What is the public sector
Refers to that part of the economy which is owned or controlled by local or central government
Outline the difference between profit and not for profit organisations
• 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
What is organic growth
firm example too
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
What is integration
When businesses are brought together through a merger or takeover.
Advantages of organic growth
• 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
Disadvantages of organic growth
• 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.
Better definition of integration
Integration is growth through amalgamation, merger or takeover. A merger or amalgamation is where one firm buys another.
What is verticals integration
Example
The integration of firms in the same industry but at different stages in the production process.
Tescos takeover of booker in 2018.
What is backwards integration
If a merger takes the firm back towards to supplier of a good, it is backwards integration
What is forward integration
When the firm is moving towards the eventual consumer of a good
Advantages of integration
• 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
Disadvantages of integration
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
What is horizontal integration
Example
Where firms in the same industry at the same stage of production integrate
2015, AstraZeneca acquired ZS pharma
Advantages of horizontal integration
• 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
Disadvantages of horizontal integration
Will increase risk for the business as if thay particular market fails, they have nothing to fall back on.
What is conglomerate integration
Example
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
Advantages of conglomerate integration
• 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
Disadvantages of conglomerate integration
Going into markets which they have no expertise. Can often be damaging
Constraints of business growth
• 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
What is a demerger
Example
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
Reasons for demergers
• 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
Impacts of demergers on workers
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
Impact of demergers on businesses
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
Impact of demergers on consumers
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.
