3.1 Business Growth Flashcards
Why do firms wish to grow?
To experience economies of scale
To gain market share so they have more price setting power
To have accumulate more assets in case of financial instability
What is the principle agent problem?
It occurs in firms where there is a separate of ownership of the company. The agent, acts on behalf of the principle in a way which is not in the best interest of the principle.
What is an example of the principle agent problem?
Antony Jenkins, 2015, CEO of Barclays was not managing the company as shareholders wished for it to be run.
What is the difference between public and private sector?
The public sector is controlled and owned by central or local governments but the private sector is controlled and owned by individuals
What is the difference between between organic and inorganic growth?
Organic growth is when a firm grows by increasing its output, whereas inorganic growth is by merger or acquisition.
What are the advantages of organic growth?
Integration is time consuming, expensive and risky, with research suggesting integration leads to a deterioration of the firms long terms stock price
The firm gets to keep control of its business
What are the disadvantages of organic growth?
It is slow
It is hard to come up with new ideas
It is good for firms who are looking to enter new markets
What is integration?
Integration is when a company grows via merger, amalgamation or takeover
What is the difference between a takeover and merger/amalgamation?
Takeover is ‘hostile’ and one company buys another company out, but merger/amalgamation is when two companies come under joint ownership.
What is vertical integration?
This is when the firms are at different stage of the production process
What is the difference between forward and backward integration?
Forward integration is when a firm moves closer to its customer, but backward is when the firm moves closer to the supplier
What are the advantages of vertical integration?
It leads to more profit as there is no middle man
It reduces supply chain uncertainty as they will always know what is happening with their goods
In backward integration, they can have lower prices with suppliers
In forward integration you can make exclusive deals with outlet owners that competition won’t be able to make
What are the disadvantages of vertical integration?
Firms are often entering industries in which they have no expertise, e.g a car manufacturer buying a showroom
What is horizontal integration?
This is when firms integrate with other firms are the same stage of the production process as them
What are the advantages of horizontal integration?
Gain market share and reduce competition
Entering an industry in which they have expertise in already
Firms can specialize and rationalize to dominate different segments in the market
What are the disadvantages of horizontal integration?
It carries a high risk as if the industry was to collapse, the firm would collapse
What is conglomerate integration?
This is when two firms in unrelated industries come and merge
What are the advantages of conglomerate integration?
Diversify risk
Individual department have more room to go as they can use managers from each firm where needed
It is useful when firms have achieved saturation in the market in which they operate
What are the disadvantages of conglomerate integration?
Going into completely unrelated industries can damage brand image
Why do some firms remain small?
Size of the market
Owner Objectives
Access to finance
Regulation
What is a demerger?
This is when a firm is split into two or more separate entities which exist independently.
What are reasons for demergers?
Lack of synergies
Focussed Companies
Share price value
Avoid Regulatory Authorities
