Business Growth! Flashcards
Why do firms want to grow?
Reduce costs - EOS
More profit
Increase market share - influence prices
Restrict other firms joining the market
Increase variety
What is the separation of control?
Shareholders own the firm but don’t take part in the day to day runnings of the business. This is handled by senior managers who work for the company. Shareholders are represented by a board of directors, people with the most shares have the most power.
What’s the principle agent problem?
The directors of a company will want to maximise profits, whereas the managers and employees will want to maximise their own benefits. The principal agent problem is where one group makes decisions on behalf of another group. To avoid the PAP, a firm may try to satisfice, where a compromise is made between objectives.
What’s an example of the principal agent problem?
The Enron Scandal, where executives found loopholes to hide billions of dollars of debt from the board of directors. When found out, a lawsuit was filed by directors, resulting in the company share price dropping from $100 to $1 in less than one year.
What’s the private sector?
The part of the economy that’s owned and run by individuals or a group of individuals, including sole traders and PLC’s.
What’s the public sector?
The part of the economy that’s controlled by a local or a central government.
What are the two types of business growth?
Internal (organic) and external (mergers and acquisitions).
How do firms grow organically?
SMEs can grow organically, through better quality and quantity of the factors of production, and through investing in economies of scale.
What’s an example of a firm that grew organically?
Lego, who grew their company by introducing new products, such as games, to grow their consumer base.
What are the pros of organic growth?
Avoid the PAP.
Avoid selling equity.
What are the cons of organic growth?
Long.
Slow.
Firms stay relatively small.
How do firms grow externally?
Through mergers, where two firms come together (usually friendly), and through acquisitions, where one firm takes over another (usually hostile).
What’s vertical integration?
The integration of firms that are in different stages of the production process. It can be forwards (towards the consumer) or backwards (towards the supplier).
What’s an example of vertical integration?
Tesco’s £3.7b takeover of Booker, that’s led to an increase in sales for Tesco’s.
What’s horizontal integration?
Where firms in the same industry and same stage of production integrate. It’s the least risky type of external growth because firms have synergy.
