3.1 Business Growth

Question 1

What are the reasons why some firms tend to grow?

Answer 1

Firms grow to:
* Make more money
* Gain monopoly power
* Achieve greater security

Growth leads to economies of scale, increased revenue, and larger profits.

Question 2

What is economies of scale?

Answer 2

Economies of scale refer to the cost advantages that firms experience as they increase their output

This helps decrease the costs of production.

Question 3

What is monopoly power?

Answer 3

Monopoly power allows a firm to influence prices and restrict market entry for other firms

This can lead to long-term profits.

Question 4

What constraints might prevent a firm from growing?

Answer 4

Constraints on growth include:
* Size of the market
* Access to finance
* Owner objectives
* Regulation

Not all firms desire to grow.

Question 5

What is the principal-agent problem?

Answer 5

The principal-agent problem occurs when the interests of the owners (principals) and managers (agents) diverge

Owners seek to maximize returns, while managers may prioritize their own benefits.

Question 6

What is the role of the Board of Directors in a firm?

Answer 6

The Board of Directors oversees the firm’s operations and represents shareholders’ interests

They are elected by shareholders at the AGM.

Question 7

True or False: The public sector aims to maximize profits.

Answer 7

False

The public sector primarily focuses on providing services, not profit-making.

Question 8

What are the two main types of growth for firms?

Answer 8

The two main types of growth are:
* Organic growth
* Integration

Organic growth involves increasing output, while integration involves mergers or takeovers.

Question 9

What is organic growth?

Answer 9

Organic growth is when a firm increases output through internal means, such as new products or increased investment

It is the most common form of growth.

Question 10

What is vertical integration?

Answer 10

Vertical integration is the integration of firms in the same industry at different stages of production

It can be either backward or forward integration.

Question 11

What is backward integration?

Answer 11

Backward integration occurs when a firm merges with or takes over its suppliers

This allows control over the supply chain.

Question 12

What is forward integration?

Answer 12

Forward integration occurs when a firm merges with or takes over its distributors or retailers

This secures retail outlets and can restrict competitors.

Question 13

What is horizontal integration?

Answer 13

Horizontal integration is when firms at the same stage of production in the same industry merge or take over

This helps reduce competition and increase market share.

Question 14

What is conglomerate integration?

Answer 14

Conglomerate integration is when firms in different industries merge or take over

This can diversify risk but may lack expertise in new markets.

Question 15

Fill in the blank: A demerger is a business strategy in which a single business is broken into _______ components.

Answer 15

[two or more]

This can be for operation, sale, or dissolution.

Question 16

What are the reasons for a demerger?

Answer 16

Reasons for a demerger include:
* Lack of synergies
* Value of the company/share price
* Focused companies
* Avoiding competition authority attention

Demergers can enhance efficiency and profitability.

Question 17

What are the potential impacts of a demerger on workers?

Answer 17

Workers may experience:
* Promotions due to new management needs
* Job losses due to efficiency goals

The outcome can vary based on the new structure.

Question 18

What can be a disadvantage of demergers for consumers?

Answer 18

Consumers may face:
* Higher prices or reduced quality
* Loss of economies of scale

However, they may also benefit from innovation and efficiency.