Business Growth

Question 1

Why might firms seek to grow?

Answer 1

• profits (to give shareholders better return)
• costs (to benefit from EOS = lower unit costs of production)
• market power (can then increase prices)
• reducing risk ( may want to diversify, if sales drop in market, they have another to generate sales)
• managerial motives (to control larger business)

Question 2

What is a firm?

Answer 2

Ah organisation that brings together FOP to produce output

Question 3

Large firms exist because?

Answer 3

• economies of scale
• industry may be natural monopoly
• barriers to entry, protects large firms from competition

Question 4

why firms remain small?

Answer 4

• lack of finance for expanding
• avoiding DEOS
• acting as suppliers from much larger firms
• acting as local monopolies at specific times
• fall in price for substitutes
• owners wish to maintain control
• small businesses are more innovative, flexible in responding to changes in market demand conditions

Question 5

What is the principle agent problem

Answer 5

A conflict in priorities between owner of assets and person to whom control of asset has been delegated, usually when there is asymmetric info

Question 6

Solution to principle agent problem?

Answer 6

Solutions align producers and managers

• employee share ownership scheme (John Lewis)
• long term employment contracts for senior management (helps get strategic buyers, however may make managers complacent)
• long term commitment

Question 7

How do businesses grow?

Answer 7

2 ways:
- organic method ( internal growth)
- external growth through: mergers,
takeovers, conglomerates

Question 8

What is organic growth?

Answer 8

Grows internally by reinvesting profits or borrowing from banks (e.g. subway) to increase:

• market share
• development of innovative products
• finding markets to sell existing products
• getting existing customers to buy more through advertising, tech to expand output

Question 9

What is external growth (mergers/acquisitions)?

Answer 9

3 types of mergers:

• horizontal integration
• vertical integration (forward and backward)
• conglomerate integration

Question 10

What is horizontal merging?

Answer 10

2 businesses in the same stage of production in same industry join together e.g. Disney and Pixar

Question 11

What is vertical merging?

Answer 11

2 firms in same industry but at different stages of production process merge. There is backward and forward integration.

Question 12

What is backward integration in vertical mergers?

Answer 12

Firm merges with a firm involved in an earlier part of production, car company and component supplier

Question 13

What is forward integration in vertical mergers?

Answer 13

Firm merges with a firm involved in later part of production, car assembly plant mergers with large distributor.

Question 14

What is conglomerate mergers?

Answer 14

2 firms in different industries merge, no common interest, food firm merging with clothing firm.
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