3.1 - Business Growth Flashcards
Reasons some firms choose to grow
- Firm will be able to experience economies of scale which helps them to decrease their costs of production. They will also be able to sell more goods and therefore make more revenue. Together, these will help a firm to make a larger profit: and many firms are motivated by profit
- A larger firm will hold a greater share of their market. This will give them the ability to influence prices and restrict the ability of other firms to enter the market, helping them to make profits in the long run
- Monopoly power often means firms have monopsony power, and so will be able to reduce their costs by driving down the prices of their raw materials
Reasons some firms choose to stay small
- Avoiding Diseconomies of Scale
- Owner’s Preference (profit satisficing)
- Niche Markets
Principal agent problem
Where one group, the agent, makes decisions on behalf of another group, the principal. In theory, the agent should maximise the benefits for those whom they are looking after but in practice agents have the temptation to maximise their own benefits. It is for this reason that many firms are not run to profit maximise but to profit satisfice
Separation of ownership and control
Firms are owned by their shareholders , who play no part in the day to day running of the business but the chief executive and senior managers work for the company and control day-to-day decision making.
Differing aims of the two stakeholders
Owners will want to maximise the returns on their investment so will want to short run profit maximise, whereas directors and managers are unlikely to want the same thing so as employees, they will want to maximise their own benefits
Public sector
The part of the economy which is owned or controlled by local or central government. The purpose of these organisations is to provide a service for UK citizens and profit making is not their main aim, some may even make a loss which is funded for by the taxpayer
Private sector
The part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs
Profit organisations
A business that operates with the primary goal of maximising profits for its owners or shareholders. These firms produce goods or services and generate revenue that exceeds costs, with profits being distributed among owners, reinvested into the business, or both
Not-for-profit organisations
A business or institution that operates to achieve social, charitable, or community-focused objectives rather than to generate profits for owners or shareholders. Any surplus revenue is reinvested into the organisation’s mission rather than distributed as profit
Organic growth
Expansion of a business using its own resources, rather than through mergers or acquisitions. This growth comes from increasing sales, expanding production, or improving efficiency
Inorganic growth
When a business expands through mergers, acquisitions, or takeovers rather than relying on internal resources
Advantages of organic growth
- Lower risk, organic growth relies on internal resources rather than risky takeovers, reducing financial and operational uncertainty
- Better control, the business grows at a steady, manageable pace, allowing for strategic decision-making
- Maintains business culture, since expansion happens within the existing company, there are no cultural clashes like in mergers or acquisitions
Disadvantages of organic growth
- Slower expansion, growing internally takes time, making it difficult to keep up with fast-moving competitors
- Limited market reach, expanding into new regions or industries can be harder without external support or acquisitions
- Competitive pressure, larger firms using inorganic growth (mergers/acquisitions) may expand faster and dominate the market
Integration
Process by which businesses expand by merging with or acquiring other firms to increase market share, reduce costs, or achieve strategic advantages
Merger
When two or more businesses agree to combine into a single entity, pooling their resources to enhance market position, efficiency, or profitability
Takeover
When one company buys a controlling stake (more than 50%) in another company, gaining full decision-making power over it. This can be done with or without the consent of the acquired company
Vertical integration
Process by which a company expands its operations into different stages of production within the same industry
Backward vertical integration
When a company acquires or merges with a supplier or moves into earlier stages of the production process. This type of integration involves securing control over the sources of raw materials or key components used in the company’s production
Forward vertical integration
When a company moves downstream in its supply chain by merging with or acquiring its distributors, retailers, or any business closer to the final consumer. This integration strategy allows the company to control the distribution, sale, and marketing of its own products
Advantages of vertical 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 do not have to worry about suppliers not supplying the goods
- With backward integration, businesses can control the quality of supplies and ensure delivery is reliable . Moreover, they don’t have to worry about being charged high prices for supplies, keeping costs low and allowing lower prices for consumers
- Forward integration secures retail outlets and can restrict access to these outlets for competitors
Disadvantages of vertical integration
- Firms may 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
- Potential for diseconomies of scale
- Reduced flexibility
Horizontal integration
Process where a company expands its operations by acquiring or merging with other companies at the same stage of the production process within the same industry
Advantages of horizontal integration
- Helps to 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 the businesses which are duplicated
- Business is able to grow in a market where it already has expertise , which is more likely to make the merger successful
Disadvantages of horizontal integration
- Will increase risk for the business as if that particular market
fails, they have nothing to fall back on and will have invested a lot of money into that area - Loss of innovation
- Risk of redundancy and job losses
Conglomerate integration
Process where a company acquires or merges with businesses that are in unrelated industries. Unlike horizontal or vertical integration, conglomerate integration involves diversifying into new sectors or markets, often outside the company’s core area of expertise
Advantages of conglomerate integration
- Useful for firms where there may be no room for growth in the present market
- A range of products reduces the risk for firms and if a whole industry fails, they will still survive due to the other parts of the business
- Will make it easier for each individual part of the business to expand than if they were on their own as finance can be easily obtained and managers can be transferred from company to company within the firm
Disadvantages of conglomerate integration
- Firms are going into markets in which they have no expertise which can often be damaging for the business
- Brand dilution
- Increased complexity in management
Constraints of business growth
- Size of the market
- Access to finance
- Owner objectives
- Regulation
Demerger
Process where a company splits into two or more separate entities, each becoming an independent company
Reasons for demergers
- Lack of synergies
- Value of the company/share price
- Focussed companies
- Avoid attention from the competition authorities
- Diseconomies of scale
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
Impacts 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 of the business could lead to a loss of economies of scale and reduce efficiency
Impacts of demergers on consumers
Consumers could gain or lose. They may gain from innovation
and efficiency, leading to better products and cheaper prices . However, demerged firms may be less efficient through loss of economies of scale or raise prices/reduce quality or range of goods as they become motivated by profits
