3.1 Business growth and objectives Flashcards
What are the differences in short run and long run in terms of business growth?
In the short run firms are free to vary the input of one of its factors but faces a fixed input on others
In the long run the firms is able to vary inputs of all of its factors of production
Why do many small firms survive?
- Supplier to larger enterprises
- Take advantage of low elasticity of demand and high income elasticity for niche products sold at higher prices
- Avoid internal EofS
- Look to satisfice instead of maximise profits for owners
- Innovative, flexible and nimble in responding to demand
- Online stores
- Keep costs low
- Benefit from external economies of scale
Why may firms decide to stay small?
Unique selling points and product differentiation
- Perceived to care more
- More scope for charging higher prices as specialist
- Flexible in meeting customer needs, locals, interact with consumers
- Deliver high customer service - competitive advantage
- E-commerce, small firms can target niche segments
- Avoid internal EofS
- More innovative and creative
What are stakeholders and shareholders?
- Stakeholders have interest in the business, may be managers, employees, customers, suppliers, banks, government and local community
- Shareholders own the business, may work in the business, mainly interested in capital gain and dividends. Return on investment and profits are sources of incomes as well as the success of the business.
Managers and employees tend to want rewards such as pay and financial incentives
Why may there be conflict between stakeholders?
Cutting jobs to reduce costs - shareholders may benefit but employees lose out
Machinery to increase productivity - customers and shareholders benefit whereas employees lose out
Increasing prices to improve profit benefits shareholders and management but opposed by customers
What is stakeholder conflict and satisficing?
In most businesses there are many stakeholders with different objectives. Firms have to chose between maximizing one objective and satisfying stakeholder objectives, called satisficing.
What is the principle agent problem?
A problem with asymmetric information. Firms cannot observe management all the time, and so there may be decisions made with conflicting views between agents and since the managers have more knowledge than the owners they can benefit. It is difficult to manage the performance and goals of managers and so the owner may have less information
The principal is the owner of the business, with a significant equity stake who are mainly interested in profit maximising as well as dividends as a source of income.
Agents are people within the business such as managers and employees who may have different objective to the principal, such as revenue maximisation to get benefits, rewards and other financial incentives
Another example may be workers avoiding work and being less motivated without the employer knowing.
How may the principal agent problem be solved?
Employee share ownership schemes
Long term employment contracts for management
Long term stock commitment - have to hold salary in stocks
What is privatisation?
Transfer of assets from public sector to private sector, causing a change of ownership. State owned businesses contribute less than 2% of GDP and 1.5% of employment
What are not for profit organisations?
-Cooperatives owned and run by members, often include farmers coops’ running on shared ownership
Social enterprises are where profits are reinvested into the community rather than satisfying investors
Dividend firms and not for profit businesses like charities, community organisations, network rail etc.
What is organic growth?
Internal growth which occurs when a business expands its own operations rather than relying on mergers or takeovers. It occurs due to:
- Increased production capacity through investment
- Development and launch of new products
- Finding new markets in emerging economies
- New channels such as e commerce
- Growing customer base through marketing
- New product ranges
- Investing in R&D
- Training employees and new technology
What are the benefits and drawbacks of organic growth
Advantages:
- Less risk than external growth - failed takeovers
- Financed through internal funds
- Builds on a business’ strengths
- Allows businesses to grow as sustainable rate
Disadvantages:
- Dependent on growth of overall market
- Hard to build market if business is already a leader
- Slow growth rates - shareholders prefer faster
- Franchises can be hard to manage effectively.
What is horizontal integration?
Mergers between businesses in the same industry at the same stage of production.
- Increased market share
- Economies of scale
- Reduced competition
- Cost savings from rationalisation of business
- Wider range of products - scope
- Buying well known brands cheaper than long run growth of brand
- Increase prestige of firm, opportunities for promotion
What are the disadvantages of horizontal integration?
- Risk diseconomies of scale
- Reduced flexibility
- Too many eggs in one basket - risk to shock in demand
- Unknown costs
- Dilutes brand
- Destroys shareholder value
- Loss of jobs as shops close - unrest with authorities, workforce and labour unions
- Risk of attracting CMA and competition authorities
What is vertical integration and the two types?
What are the advantages to both types?
Involved businesses in same industry at different stage of the supply chain.
Forward: Closer to the final consumer such as manufacturers buying retailers. They are closer to customer information, removes competing suppliers, better information, prevents ‘hold up’.
Backward: closer to raw materials in the supply chain e.g. manufacturer buying component supplier. Assured supplies in time and good quality - reduced cost of supply. Improved access raw materials - competitors may not benefit from this
Both experience widen expertise and opportunities, increased market presence and profitability, increasing share prices in long run
