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Econ (micro) THEME 3 > Business Growth > Flashcards

Business Growth Flashcards

1
Q

What is a Demerger?

A

A demerger is when a large firm is separated into multiple smaller firms, or it sells off at least one of the businesses it owns.

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2
Q

Reasons for demerger?

A
  • reducing diseconomies of scale (firms may grow to large that average costs rise with output)
  • increased business focus and control
  • remove loss making portions/ divisions (may be more profitable)
  • increase liquidity & dividend payments (generate extra revenue as firms may invest in more profitable parts of the firm)
  • lack of synergy (synergy when the whole company is worth more than each company on its own - splitting can get greater profit)
  • successful demerger - may lead to net welfare gain
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3
Q

What is dividend payments?

A

A dividend is the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors.

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4
Q

Negative Impact of demergers on businesses.

A
  • makes it smaller meaning less control in market (reduces market share)
  • less monopoly power
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5
Q

Impact of demergers on workers.

A
  • senior managers may gain promotion (one firm senior financial direction) - smaller workforce provides more opportunity for promotion
  • workers may lose jobs (structural unemployment)
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6
Q

Impact of demergers on consumers.

A
  • may be short term problems - consumers may be confused betweeen the parent and demerger firm
  • long term effects:
  • removal of diseconomies of scale or if demerger is instigated by government it would lead to more competition and hence lower prices and more choice.
  • successful demerger - net welfare gain ( w higher efficiency)
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7
Q

Why might the Gov require a demerger?

A
  • the business is seen to be acting against the public interest
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8
Q

What are the two types of growth in businesses?

A
  • internal growth (organic growth)
  • external growth (inorganic growth)
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9
Q

What is internal/ organic growth?

A

Where the firm grows by increasing their output

Firms may:

  • expanding production
  • widening customer base (more choice)
  • develop new product by diversifying their range
  • investing in development/ research / tech/ production capacity
  • may use market penetration to sell more
  • increase labour
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10
Q

What is market penetration ?

A

A measure of how much a product/ service is being used by a customer compared to the total estimated market for that product or service

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11
Q

What is diversification?

A

Increasing range of products/ markets served by a business

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12
Q

What is market saturation?

A

It occurs when products/ services in a market are no longer in demand

  • maybe cuz there is multiple offerings by competition
  • less demand
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13
Q

What is external/ inorganic growth?

A

Inorganic growth occurs by merging/ taking over another firm.

Firms can merge in three different ways:

  • vertical merger
  • horizontal merger
  • conglomerate merger
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14
Q

Describe the supply chain.

A

Supplier - manufacturer - distributor - retailer - end consumer

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15
Q

What is forward vertical integration.

A
  • forward vertical integration Involves a merger/ takeover with a firm forward in the supply chain

E.g farmer merges with manufacturer

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16
Q

What is backward vertical integration?

A

Backward vertical integration involves a merger/ takeover with a firm further backward in the supply chain

E.g retailer takes over manufacture

17
Q

What is horizontal integration?

A

This is the merger of two firms in the same industry and the same stage of production

E.g two manufactures merging with each other

18
Q

What is conglomerate integration?

A

This is Combination of two firms with no common connection.

  • not in the same stage of production or industry
19
Q

What are the advantages of organic growth?

A
  • low risk
  • control of the firm remains unchanged
  • firms can build on existing strengths and meet consumer expectations
  • more job opportunities (increased scope for management roles)
20
Q

Disadvantages of organic growth.

A
  • may be too slow for directors who wish to maximise salaries
  • people might be unaware of new ideas/ innovations/ unwilling to take new ideas (since its building on existing workers knowledge)
  • access to finance may be limited
  • diversifying range - may struggle w new ideas
21
Q

What are the advantages of vertical integration

A
  • firms can increase efficiency (gain economies of scale)
  • firms can gain more control of the market/ supply chain
  • firms could have more certainty over their production - own suppliers of components
22
Q

What are the disadvantages of vertical integration.

A
  • diseconomies of scale occur as costs increase
  • little incentive to reduce their average costs when their market share is high
  • such gains in the market share may attract the attention of the regulator
23
Q

Advantages of horizontal integration

A
  • provides instant access to increased economies of scale
  • increase in market share leading to increased market power
  • firms may gain new knowledge/ expertise
24
Q

Disadvantages of horizontal integration.

A
  • there could be disagreements in the objectives of the two firms which merged
  • such gains in the market share may attract the attention of the regulator
  • diseconomies of scale occur as costs increase
  • little incentive to reduce their average costs when their market share is high
25
Q

Advantages of conglomerate integration.

A
  • diversified portfolio of production activities may leave firm less vulnerable to recession
  • reduces overall risk of business failure
  • increased size of industry
26
Q

Disadvantages of conglomerate integration.

A
  • there may be managerial diseconomies if the management team don’t understand all aspects of the new diversified business
  • it may cause diseconomies of scale
  • such gains in market share may attract the attention of the regulator
  • there may be disagreements in the objectives of the two firms
  • there may be little incentive to reduce AC since market share is high
27
Q

Why do firms seek growth?

A
  • profits (increased size & output = increase in sales & rev)
  • costs (lower average costs (economies of scales))
  • market power
  • diversification- shifting away from single income source (growing range of sectors + markets)
  • managerial objectives- the primary goal of management team (it may be the managers aim to seek growth)
28
Q

What is market power?

A

The ability of a firm to raise prices and earn supernormal profit

29
Q

Why do some firms choose to remain small?

A
  • they are worried about experiencing diseconomies of scale if they expand
  • a firms owners do not want the extra work and risks involved in expanding
  • legal requirements differ by the size of a firm (smaller firms are more compliance than larger firms)
30
Q

Why must some firms remain small?

A
  • they are unable to finance expansions (seen a risky borrowers by banks)
  • they operate in a niche market (smaller customer base/ market size but more profitable)
  • the skills, knowledge, and expertise required may be lacking
  • the firm may lack the resources
31
Q

Types of firms?

A

Private - sector firms
Public - sector firms
Not - for - profit sector

32
Q

What are private sector firms?

A
  • Private - sector firms are not owned by the gov
  • may be owned by the shareholder or sole proprietors (owned/ run by one person)
  • private - sector firms will aim to make a profit to satisfy the demands of their owners (shareholders)
33
Q

What are public - sector firms?

A
  • firms owned by gov - as cannot survive without significant state funding ‘ or gov wants to control the outcome
  • goal is not profit maximisation but to provide a service.
34
Q

What are not - for - profit firms?

A
  • these firms consist of charities
  • exist to provide service to local, national and international communities
  • they don’t seek profit as primary goal
35
Q

What is the principal - agent problem?

A

It occurs when one group (the agent) makes decisions on behalf of the shareholder/ owner of the business (the principal), often placing their priorities above the principal’s.

36
Q

Why is the principal-agent problem a problem?

A

As the shareholders(the principal) and managers(the agent) have different objectives - managers may want to maximise salaries whereas the shareholder may want to maximise profits - this is a result of asymmetric information

37
Q

Describe the high profile dismissals according the principal agent problem.

A

Antony Jenkins of Barclays Bank in July 2015, lost his job as he was unable/ willing to cut costs and hence increase profit fast enough.

Econ (micro) THEME 3 (6 decks)

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