Business Growth

Question 1

Reasons to grow (5)

Answer 1

More sales/profit 
Market share
Diversify (risk-bearing)
E.O.S
Owners objectives

Question 2

Reasons to stay small (5)

Answer 2

Lack finance
Regulations to prevent too large growth
Niche/personalised market hard to grow/want to maintain luxury image
Dis.E.O.S
Owners want to satisfice

Question 3

Divorce of ownership and control-principle agent problem

Answer 3

Agents make decisions to benefit them rather than in alignment with principal’s objectives

Question 4

Reasons why agents rev max and eval:

Answer 4

Bonuses
Prestige (manager of larger firm with higher MS)
Long term market power
Economies of scale (more output than profit max)

Eval:short term not as much as PM

Question 5

Reasons for sales max +2 examples

Answer 5

Build sales by selling at lowest price possible (AC=AR) while making SNP for complements e.g PS3 and its games or Tesco’s turkey

Question 6

Profit satisficing

Answer 6

Making enough to satisfy influencers of firm then pursue other objectives e.g social, environmental

Question 7

Reasons to profit max (3)

Answer 7

Re-investment-esp in pharmaceuticals/electronics
Dividends to shareholders-satisfy them as they provide finance
Profit max means lower cost which can be passed on to consumers

Question 8

Organic vs Inorganic growth

Answer 8

Organic is investing in the business to grow, inorganic is through merging/acquiring

Question 9

Ways to organically grow (3)

Answer 9

Retained profit, bank loans, share equity

Question 10

4 types of inorganic

Answer 10

Forward/backward vertical-different production stage
Horizontal-same production stage
Conglomerate-different industry

Question 11

Pros cons of organic growth (2,2)

Answer 11

Retain ownership
Lower risk
Slow growth
Can still lose ownership if sell too many shares/franchise too much

Question 12

Pros cons of vertical integration (3,4)

Answer 12

Take control of supply chain-reduce comp
Reduce intermediary costs
Better access to raw materials/consumers

Regulation to prevent anti comp practice
DisE.O.S
Acquisitions expensive initially
May lack expertise

Question 13

Pros cons of horizontal integration (3,3)

Answer 13

E.o.s
Rationalise (reduce dupe costs)
Reduced comp (increased MS)

DisE.O.S
Job losses
Brand dilution e.g Gucci merging w primark

Question 14

Pros of conglomerate integration (3)

Answer 14

E.O.S (Esp risk-bearing-diversifying)
Increased brand awareness (worlds collide)
Knowledge transfers e.g apple and beats

DisE.O.S
Brand dilution
Lack of expertise

Question 15

Reasons for demergers 4

Answer 15

Decrease disE.O.S
Increase specialisation and productivity
Asset sales
Cultural differences-reduced conflict, workers happier

Question 16

Effect on workers in demergers

Answer 16

Fall in conflict from cultural differences-morale up

However job security, unknown what division they’ll go, or even complete job loss

Question 17

Consumers on demergers

Answer 17

Lower prices and higher quality due to reduced disE.O.S and increased specialisation
However reduced E.O.S too as output falls, so costs+prices increase

Question 18

Reasons against profit max (3)

Answer 18

Hard to calculate it-must be aware of MC and MR
Greater scrunity from CMA-could result in forced increased costs or lower prices
Other objectives may be better suited-e.g sales max where competition is heavy

Question 19

Reasons for sales max (4)

Answer 19

E.O.S
Limit pricing
Principle agent problem-sales related bonuses
Flood the market-brand loyalty

Question 20

How to overcome principle agent problem (2) and example

Answer 20

Long term share commitment-e.g in Apple, senior exec required to hold 3 times their salary in shares, and keep for min. 5 years.

Greater business transparency-publish accounts