3.1 - Business growth Content Flashcards
3.1 - Business Growth
How to small firms survive
[6]
3.1.1 - Sizes and types of firms
- They might take advantage of low-price elasticity of demand (PED) and high income-elasticity (YED) for specialist ‘niche’ or ‘bespoke’ products that can be sold at a higher price with a larger profit margin per unit - by expanding you may lose the niche or bespoke aspect so reason to stay small
- Can avoid internal diseconomies of scale
- Lifestyle enterprises where owners are looking to satisfice not maximize profits
- Innovate, flexible and nimble in responding to changes in market demand
- Keep over-head costs low
- Benefit from external economies of scale
3.1 - Business Growth
What is the divorce of ownership from control?
- Large companies appoint directors rather than have owners run them, owners largely have nothing to do with day-to-day operations
- So there is a divorce of ownership from control
3.1 - Business Growth
What happens when there is a divorce of ownership from control
- The board of directors oversee the CEO and senior managers who actually run the firm
- This can result in a form of the principle agent problem where one group makes decisions on behalf of another
- The CEO should put shareholders first
- In practice, the agent almost always maximises their own benefit -> this could be through giving themselves large bonuses
3.1 - Business Growth
How to solve the divorce of ownership from control
- The shareholders do have control through the Annual General Meeting where they can vote people off and onto the board
- Alterately they have the opportunity to sell their shares too which can place pressure on the board if the price were to drop
3.1 - Business Growth
Why do firms want to grow?
- Economies of scale (Reduce costs so inc profit).
- Increased market influence (and over price)
- Increased market share (Inc. access to credit).
- Larger product range - more diverse / stable.
3.1 - Business Growth
Who controls private sector organisations?
Individuals
(For profit)
3.1 - Business Growth
Who controls public sector organisations?
Governmental bodies
(Not for profit)
3.1 - Business Growth
What are the constraints on growth?
[7]
- Owner’s Objectives.
- Type of product - e.g. winter gloves (seasonal).
- Market size - e.g. left-handed scissors.
- Bureacurcay, red tape and regulation - regular tax returns and health and safety requirements
- Access to finance
- Competition
- Skill shortages
3.1 - Business Growth
Through what kind of processes does organic growth of businesses occur?
Through internal processes. (relies on own resources)
3.1 - Business Growth
How is organic growth measured?
Through comparing sales/revenue year over year
3.1 - Business Growth
What are the benefits of organic growth
- Less risk -> Mergers go wrong all the time. In 2/3s of cases, the mergers make the firms less profitable (The Economist) They might suffer from
- Diseconomies of scale
- Cultural issues.
- Communication problems.
- No reduncy costs. - less wasted resources
- Less likely to recieve CMA attention
- Managable pace of growth
- The management know & understand every part of the business
- Builds on a businesses’ existing strengths (customer base)
3.1 - Business Growth
What are the disadvantages of organic growth
- Very slow - won’t please shareholders
- Might find it difficult to access finance if they do not have collateral.
- You might get bought out by a competitor
- Not suitable when trying to break into a foreign market
- Growth is very dependent on the growth of the overall market/consumer demand
- Not necessarily able to benefit from economies of scale
3.1 - Business Growth
What is vertical integration?
- Merging with a firm
- In the same industry
- But at a different stage in the production process.
3.1 - Business Growth
What is the difference between forwards and backwards vertical integration
- Forward vertical - moving closer to the customer. E.g. Luxotica purchasing Sunglass Hut.
- Backwards Vertical - Moving closer to the primary product E.g. Tesco and The Booker Group
3.1 - Business Growth
What are the advantages of forward vertical integration
- Creates a secure market for firms products
- Retailers profits now belong to the firm.
- Share information about consumer tastes/preferences
- Can offer better customer service and a more competitive price.
3.1 - Business Growth
What are the advantages of backwards vertical integration
[4]
- Suppliers profit now belongs to the retailer.
- Firm gets priority treatment for supplies and has more power to ensure quality - create brand loyalty.
- Can offer customers with more competitive prices - win win. E.g. Tesco-Booker.
- May be cost savings -> integrating with a supplier may increase efficiency
3.1 - Business Growth
What are the disadvantages of forward vertical integration
[5]
- Firms may not be experienced in running retail.
- Cultural issues/ diseconomies of scale
- Retailer may offer reduced choice to consumers and only stock the parent companies products.
- Firms often pay too much for firms
- Key workers may leave, loss of expertise
3.1 - Business Growth
What are the disadvantages of backwards vertical integration
[4]
- Suppliers may become complacent as there will always be a customer - x-ineffiency.
- Cultural issues/ diseconomies of scale.
- Firms often pay too much for firms
- Key workers may leave, loss of expertise
3.1 - Business Growth
What are the advantages of horizontal integration?
[5]
- Rapid increase in market share/Elimination of competitors
- Firms can specialise and rationalise
- Already has expertise in industry, merger likely to be successful
- Potential for economies of scale
- Revenue synergies – 1+1=3 extra benefits. Two companies’ combined can generate more sales than the sum of the two individually
3.1 - Business Growth
What are the disadvantages of horizontal integration?
[8]
- Time-consuming, high risk
- Potential loss of control for part of firm
- Integration challenges, such as cultural differences
- More scrutiny from the competition authorities – could be worried that competition will be substantial lessened. The authorities could stop the merger
- May divert management’s attention from core operations
- Overpaying
- Reduced flexibility – more people and process means the need for more transparency and so more legal accountability and red tape. Slower innovation and increased costs
3.1 - Business Growth
What is Conglomerate integration?
The integration of firms in different industries with no common connections.
3.1 - Business Growth
What are the advantages of conglomerate integration?
[6]
- Diversify to be less reliant on the success of one product - reduce risk - diversification of risk
- Opens a new market if growth is slow in existing markets. - New opportunities for growth
- Size of a conglomerate makes it easier to obtain finance
- Capitalizing on unrelated opportunities.
- Potential for higher returns in diverse markets.
- Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate
3.1 - Business Growth
What are the disadvantages of Conglomerate Integration
[5]
- Possible lack of expertise in new products/industries
- Diseconomies of scale can quickly develop
- Usually results in job losses - loss of experienced workers
- Worker dissatisfaction due to unhappiness at the takeover can reduce productivity
- Overpaying
3.1 - Business Growth
What are the disadvantages of mergers and acquisitions for consumers
- Larger firms may have more market power, making demand more inelastic. Firms can raise prices to achieve greater profits and revenues, at the expense of the consumer. Less consumer surplus.
- Any cost savings made by EOS may just be paid to shareholds or CEOs, rather than benefiting consumers.
- Might create diseconomies of scale or x-inefficiency
- Less choice
3.1 - Business Growth
What are the disadvantages of mergers and acquisistions for employees
- The initial merger may lead to job losses as the firm looks for cost savings - store closures.
- Duplicate staff members will be made redundant.
3.1 - Business Growth
What is a demerger?
When a company splits off
3.1 - Business Growth
Why can company value lead to demergers?
Some parts maybe worth more than company combined
3.1 - Business Growth
Reasons for Demergers
- Reducing diseconomies of scale - smaller firm means less diseconomies of scale so possible increased profit
- Increased business focus
- Cultural differences
- Remove loss making divisions
- Increase liquidity & dividend payments
- Comply with the demands of the Competition Commission - due to high levels of market share
3.1 - Business Growth
Impacts of demerger on Businesses
- Opportunity for a more narrow focus on the core business
- Removing loss-making portions of the business
- Increased efficiency and lower costs/unit
- Increasing the annual profits for the year that the demerger occurred
- Removing some difficult cultural differences
- Long term – higher returns/operating profits
- Short term costs of selling the business especially if sold at low price
3.1 - Business Growth
Impacts of demerger on Employees
- Some workers may lose their jobs
- Reduced friction from cultural differences can help build better team dynamics
- Smaller workforce provides more opportunity for promotion
- Less complication in daily tasks due to more narrow focus
- Opportunity for managers of newly demerged business to assume new responsibilities
3.1 - Business Growth
Impact of demerger on consumers
- If successful, better quality products & customer service
- If successful, lower prices due to the firms new efficiencies
- If unsuccessful, a narrower product range & perhaps worse quality/customer service
- Impact on prices depends on the effect of a demerger on the intensity of industry competition
- Impact on prices depends on whether a demerger leads to fewer economies of scale being harnessed
