3.1.1, 3.1.2, 3.1.3 Business growth

Question 1

Why do firms choose to remain small?

Answer 1

1. Legal requirements are simpler and cheaper to comply with
2. Concern about DEOS
3. Worry about extra work and risks involved with expanding
4. Small firms have a greater awareness of and control over environmental impact
5. Remaining small to avoid being noticed and taken over by large firms

Question 2

Why do firms choose to grow in size?

Answer 2

1. To increase profit by: increasing EOS, increasing market share and reducing comp. and expanding into new markets
2. To achieve managerial objectives (e.g. status)

Question 3

What is the ‘principal-agent’ problem?

Answer 3

When those who are in control act in their own self-interest, rather than the interest of the owners

Divorce of ownership and control: when two layers of hierarchy are not aligned (owners and directors)

Question 4

Distinction between public and private sector organisations

Answer 4

Public: government led
Private: individual organisations/firms

Question 5

Distinction between private and not-for-profit organisations

Question 6

How do we measure the size of firms?

Answer 6

• no. of employees
• asset values
• stock market value (market capitalisation)
• sales revenue
• market share: amount of the market that the business owns

Question 7

Types of business growth

Answer 7

Organic/internal growth

External/inorganic growth:
- vertical integration (forward and backward)
- horizontal integration
- conglomerate integration

Question 8

What is organic/internal growth?

Answer 8

Growth as a result of a firm increasing the levels of the factors of production it uses (e.g. increasing output by building a larger factory/hiring more labour/increasing the amount of raw materials used)

Question 9

What is inorganic/external growth?

Answer 9

Growth as a result of:
- mergers: when two firms unite to form a new company
- takeovers: when one firm buys another

This growth is also quicker and usually cheaper than organic growth, also making it easier to gain experience and expertise in new business areas.

Question 10

What is vertical integration?

Answer 10

Vertical: combining firms at different stages of the production process of the same product

Forwards: when a firm takes over a firm that is further forward in the production process (closer to consumers)
Backwards: when a firm takes over a firm further back in the production process (further from consumers)

Question 11

What is horizontal integration?

Answer 11

Combining firms that are at the same stage of the production process of similar products

Question 12

What is conglomerate integration?

Answer 12

Combining firms which operate in completely different markets

E.g. Unilever, Tata

Question 13

Advantages of organic growth

Answer 13

• the firm has control over exactly how the growth occurs
• sustained/balanced/controlled growth
• internal financing: less risk - retains profit (not relying on other businesses that may have different motives)
• builds on strength and expertise rather than importing

Question 14

Disadvantages of organic growth

Answer 14

• time consuming (requires patience)
• profit opportunity cost: have to decide what to do with it
• market share: slow take up
• expensive

Question 15

Advantages of vertical integration

Answer 15

• reduced costs
• profits aren’t being taken/lost along the supply chain: removing “middlemen”
• more control over the supply chain
• improve quality standards/productivity/efficiency (no-one trying to take from the business)

Question 16

Disadvantages of vertical integration

Answer 16

• supply chain “challenges”: dispute/arguments
• costly/big risk for companies doing takeovers
• regulatory scrutiny: comparing prices/market shares

Question 17

Advantages of horizontal integration

Answer 17

• potential economies of scale: avg. costs fall as firms get bigger
• reduces competition in the market
• rapidly acquire market share

Question 18

Disadvantages of horizontal integration

Answer 18

• possible diseconomies of scale
• monopoly power: regulation
• businesses culturally incompatible

Question 19

Advantages of conglomerate integration

Answer 19

• diversification of firms
• risk management: if one part of the firm does badly, it can be compensated for by profit from another part
• increased opportunities in more markets
• more profit in diverse markets
• allows firms to use profits generated by one product to invest in another

Question 20

Disadvantages of conglomerate integration

Answer 20

• hard to manage: long and complicated process
• less business synergy between “random” businesses
• diseconomies of scale

Question 21

Overall disadvantages of business growth

Answer 21

• duplication of staff, leading to some staff being made redundant (e.g. leaders)
• merged firms can have different and incompatible objectives
• firms can be put in debt to raise finance necessary to complete a takeover
• diseconomies of scale
• when a firm takes over another firm, it may overestimate the value of the firm: makes it hard for the new larger firm to make a return on investment

Question 22

Advantages of business growth on consumers

Answer 22

• price reductions: due to EOS
• combined creativity: production of superior products, innovation

Question 23

Disadvantages of business growth on consumers

Answer 23

• can have less choice
• may lead to higher prices: due to reduction in comp.
• price increases: the merged firms could produce less output than two separate firms

Question 24

What are demergers?

Answer 24

When firms sell/break of part(s) of its business to create a separate firm/firms

Question 25

Why might firms demerge?

Answer 25

• having difficulties inherent in managing large firms
• recognising the benefits in becoming ‘more focused/specialised’ in particular areas
• pressures from shareholders/new firms
• diseconomies of scale
• changes in market condition/tech (e.g. other firms may be better at producing)

Question 26

Impacts of demergers on businesses

Answer 26

• more efficient firms
• can focus on improving production processes
• EOS and DEOS may be reduced
• greater independence
• the demerger firm’s market value is likely to increase compared to its market value when part of a larger organisation
• may be difficult to sell of unprofitable parts of a firm: may have to result in it being sold for a huge loss - can harm the image of the demerger firm and make shareholders unhappy

Question 27

Impacts of demergers on workers

Answer 27

• an improvement in manager-worker relations may be seen: fewer employees
• more jobs could be created
• workers may lose morale if the situation surrounding the demerger is not explained clearly

Question 28

Impacts of demergers on consumers

Answer 28

• likely to be improved consumer choice and falling prices as comp. increases
• consumers will be less confused as to what each company does
• consumers are likely to benefit from having small firms that are more focused on consumer needs

Question 29

Constraints on business growth

Answer 29

• size of the market: saturation
• access to finance (financial constraints): operating costs/costs of growth
• owner’s objectives
• regulation: price setting by large firms
• tech and innovation: creative destruction - lack of innovation, slow advancements
• competition: big firms making it hard for small firms to enter/expand
• resources: access to raw materials or lack of resources to cope with additioanl regulations/bureaucracy
• lack of skills and expertise to expand (e.g. entrprenurial skill)
• business cycle
• global matters
• environmental awareness