Business Growth

Question 1

Reasons for firms to grow:

Answer 1

+ Make more sales and profit

+ Increase market power

+ Diversify and enjoy risk-bearing economies

+ Expanding internal economies of scale

+ Owners objectives

Question 2

Reasons for firms to stay small:

Answer 2

• Don’t have the finance to grow
• Regulations limit growth
• Niche markets and selling personalised goods
• Diseconomies of scale e.g. alienation, bureaucracy, communication
• Profit satisfice

Question 3

What are the 6 types of internal economies of scale?

Answer 3

Risk-bearing, Managerial, Financial, Purchasing, Technical, Marketing

Richards (risk-bearing)
Mum ( managerial)
Flies (financial)
Past (purchasing)
The (technical)
Moon (marketing)

Question 4

As firms grow bigger, they might experience…

Answer 4

The divorce of ownership and control

Question 5

The divorce of ownership and control can lead to…

Answer 5

The principle-agent problem

Question 6

What is the principle-agent problem?

Answer 6

When the agent (e.g. the manager who runs and controls the business) pursues different objectives to the principal (e.g. the shareholders who own the business)

Question 7

What is the divorce of ownership and control?

Answer 7

When the managers/directors of a firm are different from the owners of the firm

Question 8

What are private sector firms?

Answer 8

Private sector firms are firms owned by private individuals (private shareholders) e.g. Apple, Virgin, Barclays, corner/ barber shops

Question 9

What are public sector firms?

Answer 9

Public sector firms are firms owned by the state or government e.g. NHS, transport (the tube), BBC

The type of firms are run to benefit the public

Question 10

What are ‘for-profit firms’?

Answer 10

Firms that are looking to make a profit e.g. Apple, Virgin, Barclays

Question 11

What are ‘not-for-profit’ firms?

Answer 11

Firms are not looking to just make a profit, they also pursue other social and environmental objectives e.g. Oxfam, Barnardos, Young Enterprise

Question 12

What is organic growth?

Answer 12

Where firms grow by investing in themselves to increase output e.g. reinvesting their own profit back into the company, selling shares, bank loans

Question 13

What is inorganic growth?

Answer 13

Where a firm grows by merging or acquiring another company

Question 14

What are the 4 types of inorganic growth?

Answer 14

backward vertical integration, forward vertical integration, horizontal integration, conglomerate integration

Question 15

What is vertical integration?

Answer 15

When firms at different stages of the production process join together

Question 16

What is forward vertical integration

Answer 16

It involves a supplier merging with one of its buyers

Question 17

What is backward vertical integration

Answer 17

A firm integrates with another firm that is further away from the consumer in the same production process

Question 18

What is horizontal integration?

Answer 18

When a firm integrates with another firm at the same stage of the production process

A merger between two firms in the same industry at the same stage of production

Question 19

What is conglomerate integration?

Answer 19

When two firms in unrelated industries merge together

The merging of two firms with no common interest

Question 20

List the pros of organic growth:

Answer 20

+ Keeping ownership and control by bank loans or reinvesting back into the firm itself to grow organically so the owner will take most of the profits

+ Low risk because the firm expands by increasing its own output in a market its already familiar with and selling a good/service it is already good at producing

Question 21

List the cons of organic growth:

Answer 21

• Losing ownership by selling too many shares and control by setting up too many franchises
• Slower growth whereas growing inorganically can speed up growth

Question 22

List the pros of vertical integration:

Answer 22

+ Control of the supply chain and prevent competition

+ Reduce intermediary costs

+ Better access to raw materials and consumers

Question 23

List the cons of vertical integration:

Answer 23

• Regulation is a disadvanatge to firms if they try to vertically integrate and control the supply chain
• Costs can increase because of dieconomies of scale where a firm could get too big and increase its LRAC and reduce profits and acquisition where acquiring another company could be too expensive
• Firms may lack expertise

Question 24

List the pros of horizontal integration:

Answer 24

+ Internal economies of scale (RBMFPTM)

+ Rationalisation (when a firm reorganises to cut costs)

+ Reduced competition and increased profit

Question 25

List the cons of horizontal integration:

Answer 25

• Internal diseconomies of scale (alienation, bureaucracy, communication)
• Job losses
• Brand dilution (where a luxury good merges with a normal good)

Question 26

What are internal economies of scale?

Answer 26

When LRAC decreases as a firms size increases

Question 27

List the pros of conglomerate integration:

Answer 27

+ Internal economies of scale (risk-bearing economies - helps a firm diversify and reduces the cost of failure in one sector as the firm will still be making profit in others)

+ Increased brand awareness

+ Knowledge transfers (increase dynamic efficiency helping increase production potential overtime enabling them to produce newer, more exciting products)

Question 28

List the cons of conglomerate integration:

Answer 28

• Diseconomies of scale (ABC)
• Brand dilution
• Lack of expertise (reduce productivity, increase costs and decrease profits)

Question 29

List the reasons for demerging:

Answer 29

+ Reduction of diseconomies of scale:
demergers reduce the size of the firm. This reduces diseconomies of scale, decreasing costs and increasing firm profits.

+ Specialisation:
by demerging, both firms can separate and specialise in their own goods/services, increasing productivity and quality, decreasing costs and increasing sales, and increasing firm profits.

+ Asset sales:
by demerging, a firm can sell one of its divisions and its assets, to raise money. This will increase profits, which can be reinvested in other areas of the business to increase dynamic efficiency.

+ Cultural differences:
differences in culture within a firm can require a firm to demerge, to avoid conflicts between different departments. Reduced conflict will make workers happier, more productive, and increase profit.

Question 30

List the pros of demergers (workers):

Answer 30

+ Reduced cultural conflicts (leading to decreased tension and increased productivity and satisfaction)

Question 31

Lis the cons of demergers (workers):

Answer 31

• Lower job security (leading to loss of jobs)

Question 32

List the pros of demergers (consumers):

Answer 32

• Lower prices and increased quality

Question 33

List the cons of demergers (consumers):

Answer 33

• Reduces economies of scale (leading to increase in LRAC, increased price)