Business Growth Flashcards
What is a Demerger?
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.
Reasons for demerger?
- 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
What is dividend payments?
A dividend is the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors.
Negative Impact of demergers on businesses.
- makes it smaller meaning less control in market (reduces market share)
- less monopoly power
Impact of demergers on workers.
- senior managers may gain promotion (one firm senior financial direction) - smaller workforce provides more opportunity for promotion
- workers may lose jobs (structural unemployment)
Impact of demergers on consumers.
- 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)
Why might the Gov require a demerger?
- the business is seen to be acting against the public interest
What are the two types of growth in businesses?
- internal growth (organic growth)
- external growth (inorganic growth)
What is internal/ organic growth?
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
What is market penetration ?
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
What is diversification?
Increasing range of products/ markets served by a business
What is market saturation?
It occurs when products/ services in a market are no longer in demand
- maybe cuz there is multiple offerings by competition
- less demand
What is external/ inorganic growth?
Inorganic growth occurs by merging/ taking over another firm.
Firms can merge in three different ways:
- vertical merger
- horizontal merger
- conglomerate merger
Describe the supply chain.
Supplier - manufacturer - distributor - retailer - end consumer
What is forward vertical integration.
- forward vertical integration Involves a merger/ takeover with a firm forward in the supply chain
E.g farmer merges with manufacturer
What is backward vertical integration?
Backward vertical integration involves a merger/ takeover with a firm further backward in the supply chain
E.g retailer takes over manufacture
What is horizontal integration?
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
What is conglomerate integration?
This is Combination of two firms with no common connection.
- not in the same stage of production or industry
What are the advantages of organic growth?
- 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)
Disadvantages of organic growth.
- 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
What are the advantages of vertical integration
- 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
What are the disadvantages of vertical integration.
- 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
Advantages of horizontal integration
- provides instant access to increased economies of scale
- increase in market share leading to increased market power
- firms may gain new knowledge/ expertise
Disadvantages of horizontal integration.
- 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
Advantages of conglomerate integration.
- diversified portfolio of production activities may leave firm less vulnerable to recession
- reduces overall risk of business failure
- increased size of industry
Disadvantages of conglomerate integration.
- 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
Why do firms seek growth?
- 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)
What is market power?
The ability of a firm to raise prices and earn supernormal profit
Why do some firms choose to remain small?
- 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)
Why must some firms remain small?
- 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
Types of firms?
Private - sector firms
Public - sector firms
Not - for - profit sector
What are private sector firms?
- 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)
What are public - sector firms?
- 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.
What are not - for - profit firms?
- these firms consist of charities
- exist to provide service to local, national and international communities
- they don’t seek profit as primary goal
What is the principal - agent problem?
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.
Why is the principal-agent problem a problem?
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
Describe the high profile dismissals according the principal agent problem.
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.
