Business Growth Flashcards
List (6) reasons Firms may remain small?
- Owner wants to retain control of business –> unwilling to expand
- Niche Market –> size of market small, specialist market –> D↓ firm remain small
- Access to finance –> high risk business –> banks unwilling to lend money
- Lack of EOS –> no incentive for firm to grow –> no saving to be made
- individual services –> e.g. personal trainer or nail bars, if service done by one person hard to expand
- Regulations –> CMA stopped Asda + Sainsburies
List (6) Reasons firms may grow?
- Benefit from EOS –> ↓Costs per unit of output
- ↑Market Share –> Control prices, and retain loyal customers + ↓threat of competition
- Reduce Risk –> able to diversify goods + services, expand into other markets + dependence on suppliers
- Increase Brand loyalty
- Avoid future Acquisition
- Higher Dividends + Profits
What is the Principle agent problem?
Divorce of ownership from control
- Aims of firms owner (principals) differ from the managers (agent)
–> principals aim to maximise profits and dividends
–> agents may aim to maximise sales even at expense of profits (managers pay often related to sales)
–> Satisfication + Asymmetric Info
Principle-Agent Problem possible solutions (4)
- Employees paid in companies shares –> incentive for business to do well (John Lewis)
- Bonus schemes related to profit
- Long term contracts with management to ensure goals are aligned with company’s long-term goals
- Monitor managers better
Types of firms (3)
- Private Sector
- Public Sector
- Not for Profit
What are the aims of for Profit Vs. Non-Profits organisations?
For Profit
- Maximise Profits
Non-Profits
- Primary motive not profit, though do have to cover costs of opperation
Types of Growth + definition?
- Organic / Internal Growth –> Firms expand by investigating in themselves (sell to new markets, increase capital, new products, increase customers)
- Inorganic Growth –> firms expand through mergers and acquisitions
Advantages (5) Vs. Disadvantages (4) of Organic Growth
Ad
- Management understands business
- Firms can quickly respond to changes in Market
- No need for restructure
- Less risk (e.g. no mergers)
- Less expensive
Dis
- Growth slower than mergers or takeovers
- Decrease competitiveness of business
- Business doesn’t have access to new ideas may improve efficiency
- Firm may become specialised in insignificant areas
What is Organic (internal) Growth? + eg. Vs. External Growth
Internal –> Increase in Output and sales (growth) of business using internal resources
-> Example - Walmart
External - The expansion of a business through merger (by agreement) or takeover
What are the 3 types of integration? + definitions = e.g.
- Horizontal
–> Firms merge at same stage of production process
–> 2019 Fiat and owners of peugeot merged - Vertical; Backwards + Forwards
–> Firms merge at different stages of production process
–> Starbucks, owns coffee bean farms, warehouses, distribution and retail outlets - Conglomerate
–> Firms from unrelated markets merge
–> Virgin; media, hotels, aerospace, gyms
What are the Advantages (5) + Disadvantages (four) of Horizontal Integration?
Ad
- Gain EOS
- ↑ Market Share
- Eliminate competition, gain degree of monopoly power (depending on how big companies where)
- Reduces risk of takeover of company
- ↑Revenue / profits due to increase costumer base
Dis
- Risk of too narrow range of goods / service (no diversification)
- DOS may occur
- Buyout / takeover of firms an be very expensive
- Workers loose there jobs (workers doing duplicate jobs in firms)
Advantages (4) + Disadvantages (3) of Backwards Vertical Integration? (+Definition)
- When a firm merges with a previous step in production process
–> e.g. Starbucks merging with coffee farm
Ad
- Control over raw materials –> Supply + Quality are guaranteed at low price
- ↓Competition –> can prevent competitors from using those suppliers
- ↑Profits –> Profits of supplier become Profits of firm
- ↑ EOS
Dis
- DOS –> firms doesn’t have specialist knowledge of production
- Harder to adapt to market needs –> if buy sugar plantation hard to adapt if market wants change to artificial sweeter –> less choice for consumers
- Farmers could be worse off –> Nescafe criticised for paying farmers low wages
Forward Vertical Integration definition + Advantages (4) and Disadvantages (4)?
When firms buys another firms in the next stage of production in the same production process
Ad
- Market research more effective –> firm can adapt to consumer preferences
- ↑EOS
- ↑Profits –> Profits of other firms become profits of buying firm
- ↑Control over distribution / presentation of product
Dis
- DOS –> firms doesn’t have marketing or sales experience
- ↑Risk if product fails / market shrinks
- ↓Choice for consumers
- Monopoly power could lead to ↑Prices for consumers
Conglomerate Integration definition + Advantages (4) and Disadvantages?
- A firm buys a firm in an unrelated markets
e.g. Virgin; media, gyms, aerospace etc.
Ad
- ↓Risk –> spreads risk over multiple markets
- Different products do better at different parts of trade cycle –> ↑Profits all year round
- ↑Brand recognition
- ↑EOS –> ↑Marketing EOS
Dis
- DOS -> lack of expertise + not maximise EOS like in horizontal integration
- Possible merger with under-performing company
- ↑ Bureaucracy
- Culture clash of companies –> Low Productivity
List 3 constraints on business growth?
- Government regulations –> Gov uses regulation to ensure markets remain competitive + prevent development of monopolies
- Market Constraints –> D is limited, large-scale production inappropriate + existing competition may deter expansion
- State of Economy –> e.g. recession, D would be limited, deter expansion
What is a Demerger?
- When a large company separates into two or more smaller companies
–> dan involve dissolution of earlier merger
e.g. Whitbread sold of costa coffee chain
List 5 reasons for a Demerger?
- Focus on Core business –> Enable ↑Profits + gain benefits of specialisation
- ↑Profits –> sell of under-performing or loss-making parts of business
- Raise Finance –> Money raised can be invested into core business
- Avoid DOS–> merged firms difficult to managed e.g. bureaucracy or clashing cultures
- Demands of CMA –> may be required to increase competition
Impact of demerger on Consumers?
- ↑Competition –> ↓Prices
- More focused business –> meet consumer needs more e.g. ↑Quality
- ↓Quality –> ↓Dynamic Efficiency Parts of service limited e.g. Lloyds bank split in 2 some customers left without local branch
Impact of demerger on workers? (3)
- ↑Job security if loss-making parts of business sold (job loss if in loss-making part)
- ↓Culture clash
- ↑Focus / efficiency of business –> ↑Profits –>↑Wages
Responsibilities of Competition Regulators (4)
- Control Mergers –> f merger gives over 25% market share e.g. blocked ASDA + Sainsbury
- Control Monopolies –> e.g. Quality standards, Price regulation for necessities e.g. rail, energy or sewage
- Promote Competition + Contestability –> subsidies for small business, privatisation,
- Protect employees / suppliers –> Nationalisaton, restriction on monopsony / monopoly powers
Examples of firms with multiple industries
- Virgin; Media, Active, Planes
- Amazon; WoB, Whole Foods, Delivery
Examples of Cleared Mergers / Acquisitions
Horizontal - Airlines –> American Airways + US Airways 2013
Vertical - Ebay buying Paypal
Conglomerate - Amazon buying Whole Foods 2017
