Business Growth Flashcards
Why do firms choose to stay small
-operating in a niche market:the economies of scale may be very small compared to market size
-lack of economies of scale
-avoid diseconomies of scale
-owners may want to maintain control
-lack of finance for expansion
-the firm may have regional monopoly (only seller of their products in their area
Why do firms choose to expand
-economies of scale
-economies of scope
-managers objecitve (increased output-increased sales revenue-increased bonuses)
-to reduce risk
- increased market share
What are the two types of growth for firms
Organic and Inorganic
What is organic growth
When a firm grows by investing in itself to increase output
What is inorganic growth
When a firm grows by merging with or acquiring another firm
What are the 4 types of inorganic growth
Horizontal integration
Backward vertical integration
Forward vertical integration
Conglomerate integration
Define backward and forward vertical integration
Backward:when a firm integrates with another firm further away from the consumer in the production process
Forward:when a firm integrates with another firm closer to the consumer in the production process
Define horizontal integration
When a firm integrates with another firm at the same stage of the production process
Define conglomerate integration
When a firm integrates with another firm in an unrelated industry
Give the advantages and disadvantages of organic growth
Adv:
Maintain ownership and control (if using retained profits or bank loan)
Less risk
Disadv:
Can lose ownership and control in the business (if selling shares)
Slower growth
Give advantages and disadvantages of backward and forward vertical integration
Adv:
Control of the production chain
Reduce intermediary costs (middle man i.e. delivery driver)
Better access to raw materials
Disadv:
Regulation (usually from government)
Can lead to diseconomies of scale
Give advantages and disadvantages of horizontal integration
Adv:
Internal economies of scale
Rationalisation (when a firm reorganizes to cut costs,usually when two firms merge)
reduced competition
Disadv:
internal diseconomies of scale
Loss of jobs
Give advantages and disadvantages of conglomerate integration
Adv
internal economies of scale
increased brand awareness
knowledge transfers (when the integrated firms learn from each other)
Disadv
internal diseconomies of scale
brand dilution (when the merging brands are too different)
Lack of expertise
What is demerger
When a firm divides itself into smaller companies
What is economies of scale
When average unit costs decrease as output increases
