Business Growth Flashcards
Why would firms grow? (short answer)
To gain monopoly, to make more money, to gain greater security
How can a business growing allow them to lower cost of productions?
They can experience economies of scales
What can firms with large market shares do?
They will have the ability to influence prices and restrict the ability of new firms from entering. (monopsony power)
Why might firms choose not to grow?
Due to constraints on growth like: the size of the market, access to finance, owner’s objectives and regulation.
What is the principle agent problem?
When the agent makes decisions on the behalf of the principle. Agents are incentivised to maximise their own benefits rather than the principles which is why firms mostly profit satisfice.
How can the principle agents problem be corrected
By giving managers shares in the business
What is the difference between the public and private sector
Public sector is owned by the government whose aim is not to profit maximise. The private sector is owned by individuals.
What is organic growth and give an example of a business
Organic growth is where firms grow by increasing their output e.g via investment or opening new stores.
An example would be Lego
Give me some advantages of organic growth
Retain control over their business
Maintain their good reputation
Disadvantages of organic growth:
It is slow and expensive
Difficult to get new ideas
May miss growth opportunities
What is integration
This is growth via external means like mergers and acquisitions.
What is vertical integration (backwards or forwards)
This is when firms in the same industry buy a firm in a different stage in the production process (outlets and suppliers)
List some advantages of vertical integration?
Increased profit due to larger chain of production
Economies of scale may be achieved
less uncertainty due to owning their own suppliers (delivery is reliable)
Can control quality of suppliers
Forward integration secures retail outlets and may restrict competitors products
DIsadvantages of vertical integration?
Firms may not have expertise in the industry they have taken over
What is horizontal integration
When firms merge at the same stage of the production process
Advantages of horizontal integration
Increased market share and more power
Reduced competitors
Firms will be able to specialise
Growth in a market where they have expertise
Disadvantages include:
Loss of control
Conflict between employee and methods (disharmony)
increased risk in a single market
What is conglomerate integration?
This is when firms with no obvious connections integrate
Advantage of conglomerate integration?
Useful for when a market no longer has room for growth
Range of products reduces risk for firms (cross subsidisation)
Easier for individual parts of the business to expand
Disadvantages of conglomerate integration?
May damage a businesses reputation
Firms may enter a field they have no expertise in.
What is a demerger
A business strategy when a single business is broken down into two or more components either to operate on its own or to be sold or dissolved
What are the reasons for demergers?
Lack of synergies
Value of share price
Focussed companies
To avoid attention of competition authorities
