Business and Growth

Question 1

Why do firms grow?

Answer 1

-Increase market share
-Increase profits
-Increase sales
-Managerial ambitions

Question 2

Principle Agent Problem

Answer 2

A difference in the desires of the owners and managers of a firm.
Owners often have asymmetric information.

Question 3

Organic vs Inorganic Growth

Answer 3

Organic growth is achieved by investment from within the firm itself.
-organic growth is low risk and control remains the same.
-however it is also slow.

Inorganic growth is achieved through takeovers/ mergers between firms.

Question 4

Horizontal integration

Answer 4

Integration of firms at the same stage of production.
Advantages:
-Increased Market Share
-Economies of Scale
-Opportunities for promotion
Disadvantages:
-Dilution of the brand
-Too much risk
-Unemployment for duplicate jobs

Question 5

Backwards Vertical Integration

Answer 5

A firm merges with a supplier.
Advantages:
-reliable supply chain
-reduced cost of supply
-boosts profitability
Disadvantages:
-Lack of expertise
-High initial costs

Question 6

Forwards Vertical Integration

Answer 6

A firm merges a firm closer to the consumers.
Advantages:
-Removes competing suppliers
-Greater access to consumers
-Increasing market presence
Disadvantages:
-Lack of expertise
High initial costs

Question 7

Diversification/Conglomeration

Answer 7

When firms in unrelated business merge.
Advantages:
-Spreads the risk
-Widens brand awareness
-improves occupational mobility
Disadvantages:
-Dilutes the brand
-Difficult to manage different firms

Question 8

Constraints on Business Growth

Answer 8

Constraints:
-Regulation
-Marketing Costs
-Predatory/Limit Pricing
-Technical Barriers
-Niche Markets
-Access to Finance
-Owner Objectives

Question 9

Demergers

Answer 9

The separation of a lager company into multiple smaller ones.

This can be due to diseconomies of scale or Government Intervention.