3.1 - Business Growth

Question 1

What is a firm?

Answer 1

A production unit that transforms resources into goods and services.

Question 2

What is an industry?

Answer 2

The term used to describe a collection of firms operating in the same production process.

Question 3

Reasons for firms to grow

Answer 3

• economies of scale: larger firms offer have lower costs of production per unit of output
• increased market share: a larger firm has more market power and can control prices and retain customer loyalty. Threat of competition is also reduced.
• economies of scope: less exposed to risk they may face if they’re narrowly focused. Especially in recession, being to uniquely focused can caused uncertainty for the future of a firm.
• psychological factors: managers gain more satisfaction from working in larger company, with a big brand and being responsible for more people. Or workers motivation being driven by performance-related pay.

Question 4

Reasons for firms to stay small

Answer 4

• niche market: some operate in small specialised areas or because the demand for the product is specialised and limited.
• lack of economies of scale or to avoid diseconomies of scale: the firm has a small minimum efficient scale, the smallest output a firm can operate have exploited internal economies of scale.
• need for a dynamic, responsive, service-led firm: firms involved in design are often small and quick to respond to the needs of larger firms which buys their services.

Question 5

The principal-agent problem

Answer 5

The principal is the shareholder or owner of a business and the affect is the person responsible in charge of the day-to-day running of the business. The agents can make decisions on behalf of the business that can not match the direction in which the owners want to take the business. This becomes a problem when the principal has insufficient information about the actions of the agent. This can result in the agents dismissal. A high profile dismissal was that of Gavin Patterson at BT in June 18.

Question 6

Private sector firms

Answer 6

Those not owned by the govt. May be owned by shareholders, as with a PLC (public limited company), e.g. M&S which is trading on a stock market and allows anyone to buy shares in it. They may be family owned, with no shares traded, e.g. LEGO. Also include sole proprietors, which are owned and run by one person, such as a newsagent. Accountancy and legal firms form partnerships, which are owned by the partners. Private sector firms aim to make a profit to satisfy the demands of their owners.

Question 7

Public sector firms

Answer 7

The govt owns certain businesses, wither because they couldn’t survive without significant state funding or because the govt wishes to determine the direction the business tales. E.g.’s are the NHS which relies on taxpayer funding, and Network Rail, which operates Uk railway tracks but is owned by the govt to run on the basis that it will not make a profit for shareholders but instead reinvest any surplus funds.

Question 8

Not for profit firms

Answer 8

The not-for-profit sector accounts for charities, sometimes known as the third sector to civil society. It exists to provide services to local, national and international communities. These include include Oxfam and less well-known organisations that act as local pressure groups to help in their local communities.

Question 9

Organic growth

Answer 9

Firms can grow by expanding the scale of their operations and gaining market share. This is known as internal or organic growth and is achieved by investment within the firm by the firm. It is paid for by either ploughing back profits within the firm or by borrowing (loans or issuing more shares).

Question 10

Advantages of organic growth

Answer 10

• the lowest-risk form of growth and the control of the firm remains uncharged
• can build on existing strengths and continue with consumer expectations
• can be good for workers’ morale and there will be more job opportunities within the firm, with inc scope for management opportunities

Question 11

Disadvantages of organic growth

Answer 11

• tends to be slow
• building on the existing knowledge of current employees means that people may be unaware of new ideas or innovations or unwilling to take on new ideas that involve change.

Question 12

Horizontal integration with example

Answer 12

Firms joining at the same stage of the production process. In Aug 18 House of Fraser, a retailer, was bought by another retailer Sports Direct.

Question 13

Advantages of horizontal merger

Answer 13

To firms:
-inc market share
-economies of scale
-reduced competition
To employees and stakeholders:
-some opportunities for promotion
-increased prestige of firm

Question 14

Disadvantages of horizontal merger

Answer 14

To firms:
-risks ‘too many eggs in one basket’
-unknown costs
-risks dilution or weakening of brand
To employees and stakeholders:
-loss of jobs for those duplicating work
-unable to move to new headquarters

Question 15

Horizontal demerger with example

Answer 15

Firms splitting at the same point of the production process. BHP, a mining company sold its shale and gas assets to BP in July 18.

Question 16

Horizontal demergers advantages

Answer 16

To firms:
-reduced exposure to what might be a risky market
-removal of dis economies of scale
To employees and stakeholders:
-less risk for firm means inc job security

Question 17

Horizontal demerger disadvantages

Answer 17

To firm:
-seen as a sign of weakness
-share prices may fall
To employees and stakeholders:
-some loss of jobs as parts of the business are pared down

Question 18

Backwards vertical merger with example

Answer 18

A firm merges with a firm closer to the suppliers in a production process. The UK supermarket firm Tesco bough Booker, a food wholesaler in Nov 17.

Question 19

Backwards vertical integration advantages

Answer 19

To firms:
-assured supply in terms of quality and timing
-reduced costs of supply
To employees and stakeholders:
-widening expertise and opportunities for promotion
-inc market presence and profitability might inc share price in the LR

Question 20

Backwards vertical integration disadvantages

Answer 20

To firms:
-lack of expertise
-over-exposure to end-product in one market
To employees and stakeholders:
-initial costs may damage profitability and therefore share price in SR

Question 21

Forward vertical merger with example

Answer 21

A firm merges with a firm closer to the market or consumers in a production process. Coca-Cola, the drinks maker, bought the drinks retailer Costa Coffee in Aug 18.

Question 22

Forward vertical merger advantages

Answer 22

To firms:
-greater access to customers
-removal of competing suppliers
-better info about the final consumers
-prevents hold up problems where suppliers refuse to supple in order to achieve own goals
To employees and stakeholders:
-widening expertise and opportunities for promotion
-inc market presence and profitability may inc share price in LR

Question 23

Forward vertical merger disadvantages

Answer 23

To firms:
-lack of expertise
-over-exposure to end-product in one market
To employees and stakeholders:
-initial costs may damage profitability and therefore share price in the short run

Question 24

Vertical demerger with example

Answer 24

Firms at different stages of production are broken up. Rolls Royce, and engineering company, sold its commercial marine business to a Norwegian firm in July 18.

Question 25

Vertical demerger advantages

Answer 25

To firm:
-avoids negative attention from competition authorities
-decreases exposure to risk in market as a whole
To employees and stakeholders:
-narrows expertise and opportunities for promotion

Question 26

Vertical demergers disadvantages

Answer 26

To firms:
-cost savings are lost
-loss of investment in goodwill, branding and human capital
To employees and stakeholders:
-can focus on core product - scope for specialisation and inc returns to investors

Question 27

Diversification/conglomeration with example

Answer 27

When firms that are in lies in unrelated business areas merge. Amazon, an e-commerce retailer, bought Whole Foods, a supermarket, in June 17.

Question 28

Diversification/conglomeration advantages

Answer 28

To firm:
-spreads the risk
-widens brand awareness
To employees and stakeholders:
-increased job security and opportunities to become occupationally mobile

Question 29

Diversification/conglomeration disadvantages

Answer 29

To firm:
-dilution of brand, especially if news lines are failing companies
To employees and stakeholders:
-firm might become unwieldy (too large of disorganised to function efficiently)

Question 30

Barriers to entry

Answer 30

Obstacles to companies entering a market/industry. They can be legal barriers imposed by govt in the form of permits or patents required before a firm may participate in an industry, or they may be created by the firm in the form of advertising, brand loyalty or technical expertise.

Question 31

Size of market constraining business growth

Answer 31

Some firms serve niche market where they could increase output but would need to drop price considerably. For example the market for A-level textbooks.

Question 32

Access to finance constraining growth

Answer 32

Since the credit crisis of 08, its been hard for small and medium sized firms to borrow. Other forms of finance are limited.

Question 33

Owner objectives constraining growth

Answer 33

For example, family run businesses may only employ family members and avoid others. This may make firm easier to manage and workers may have greater incentive or loyalty.

Question 34

Heavy govt regulation constraining growth

Answer 34

Some firms are kept small because the govt wants monopolies developing.

Question 35

Demergers

Answer 35

The separation of a larger firm into two or more smaller organisations, often as the reversal of an earlier merger.

Question 36

Reasons for demergers

Answer 36

• to focus on core business, and perhaps develop the part to gain benefits of specialisation
• to raise finance (by selling the shares in the new company)
• to avoid diseconomies of scale. Merged fumes can be difficult to manage if they involve different core activities.

Question 37

Impact of demergers on businesses

Answer 37

It makes the company smaller, which means it has less control in the market (reduction in market share). Reduces its monopoly power. This may make the business less profitable, but it may also make it more profitable if it becomes more efficient - its likely to sell off its least profitable or loss-making problems.

Question 38

Impact of demergers on workers

Answer 38

Some may be forced to move location, e.g. if they are working in the headquarters of a part of a firm that experiences a change in ownership. They may lose jobs if new owners find they have workers in similar roles already.

Question 39

Impact of demergers on consumers

Answer 39

Tend to face short-term problems. E.g. their bank may change its name and the way it works, or branches might close. But the intended long-term effect, if it has been instigated by the govt, I’d to create more comp in the market and therefore lower prices and more choice for the consumer.