3.1.2 Buisness Growth

Question 1

What are the 5 reasons for firms would want to grow ?

Answer 1

1) to make more sales and profit
2) increase market power
3) diversify and enjoy risk bearing economies
4) economies of scale
5) owner’s objectives

Question 2

What is market power ?

Answer 2

This is how much control a firm has over the market. Eg prices of goods

Question 3

What are the 5 reasons firm would want to remain small ?

Answer 3

1) do not have the finance to grow
2) regulations may limit their growth (no market power) (consumer exploitation)
3) they may be in a niche market (personalied goods or service)
4) diseconomies of scale
5) profit satisfice (may not want to deal with stress of having big firm)

Question 4

What is the divorce of ownership and control ?

Answer 4

As firms get bigger, they may experience the divorce of ownership and control. For instance a company like apple may grow bigger and bigger and will sell more shares to more people. This will mean that the CEO steve jobs may have control of the buisness but will have less ownership of the buisness as shares get bigger

Question 5

What does the divorce of ownership and control lead to ?

Answer 5

This leads to the principle agent problem

Question 6

What is the principle agent problem ?

Answer 6

This is when the agent who is the manager who runs and control the buisness will have different objectives to the principle who are the shareholders who own part of the buisness. Managers may want to sales maximise instead of profit maximise which is the shareholders objectives

Question 7

What type of firms are public and private sector firms ?

Answer 7

Private sector firms are for profit firms and owned by private individuals. Their main objective is to make profit.
Public sector firms are not for profit firms and owned by the goverment. Profit is not their main objective. For example, oxfam and other charities

Question 8

What is organic growth ?

Answer 8

This is when a company grows by investing in itself to increase output. This can be from reinvesting own profits or selling shares or bank loans or opening up different franchises of same company

Question 9

What is inorganic growth ?

Answer 9

This is when a firm grows by merging or acquiring another company. For instance when T mobile and orange merged to become EE

Question 10

What are the 4 types of inorganic growth ?

Answer 10

1) backwards vertical integration
2) forwards vertical integration
3) horizontal integration
4) conglomerate integration

Question 11

What is vertical integration ?

Answer 11

This is when firms at different stages of the same production process join together in the same industry

Question 12

What is backwards vertical integration ?

Answer 12

A firm integrates backwards with another firm who is further away from the consumer in the same production process. For example a car manufacturer integrating with a car tyre firm

Question 13

What is forwards vertical integration ?

Answer 13

A firm integrates forwards with another firm who is closer to the consumer in the same production process

Question 14

What is horizontal integration ?

Answer 14

This is when firms in the same stage of the production process join together in the same industry. For example when orange and T mobile merged together to make EE

Question 15

What is conglomerate integration ?

Answer 15

This is when two firms in unrelated industries join together. For example TATA who first produed cotton merged with starbucks and jaguar

Question 16

What are the + and - of organic growth ?

Answer 16

1 pro - owner growing orgarnically by using bank loan or reinvesting profit will keep control over the company
1 con - the owner can also grow organically by selling shares and may sell a lot of shares losing ownership to the shareholders and lose control over franchises

2 pro - it is low risk as it can expand by increasing its own output in a market they are already fimiliar with
2 con - it can also mean slower growth as they can grow a lot faster through merging with other companies

Question 17

What are the + and - of vertical integration ?

Answer 17

1 pro - they will have control of the supply chain. They will be able to prevent competitor firms from entering the market by refusing to let them use these resources. Eg electricity producer buying a power grid
1 con - it can lead to regulations. For instance, regulators may stop firms from vertically integrating as they may say it prevents competition and exploits consumers with high prices.

2 pro - it can reduce intermediary costs such as middle man costs. No exploitation of higher prices as they own that part of production process and no reliance.
2 con - there may be costs from diseconomies of scale increasing the LRAC reducing profits. There can also be massive fixed costs from acquistions and mergers between companies

Question 18

What are the + and - of horizontal integration ?

Answer 18

1 pro - internal economies of scale. They can use purchasing economies to bulk buy the ingredients used to make products in bigger quantities with lower prices, reducing LRAC and profit.