Business growth

Question 1

What are the reasons some firms want to grow?

Answer 1

• Firms can increase economies of scale, this will lead to a decrease in production costs, they will then make more revenue and profit
• To gain a greater share of their market. They will then be able to influence prices and restrict the ability of other firms to enter the market
• A larger firm will have more security as they will be able to build up assets and cash which can be used in financial difficulties. They will also be able to sell a larger range of goods which protect them from price changes of individual products

Question 2

Why don’t all firms grow?

Answer 2

• size of market
• access to finance
• owner objectives
• regulation
• don’t want to grow

Question 3

What is the principle agent problem?

Answer 3

Where, in theory, the agent should maximise the benefits for whom they are looking after but instead maximise their own benefits. Therefore the firms may not profit maximise but profit satisfice

Question 4

The separation of ownership and control in firms

Answer 4

• Firms are owned by their shareholders
• The chief executive and senior managers work for the company and control day-to-day decisions

Question 5

Private sector

Answer 5

Part of the economy that is owned and run by individuals or groups of individuals

Question 6

Public sector

Answer 6

Part of the economy which is owned or controlled by local or central government

Question 7

Profit organisations

Answer 7

Aim to make a profit and to maximise the financial benefits for their shareholders . They may not necessarily profit-maximise, but their long term goal is to make money.

Question 8

Not-for-profit organisations

Answer 8

Aim for maximising social welfare. Includes charities.

Question 9

Organic growth

Answer 9

Where a firm grows by increasing their output

Question 10

Advantages and disadvantages of organic growth

Answer 10

Advantages:
- Integration is expensive and high risk. Can be poorly managed
- Firms can keep control of the business
Disadvantages:
- Another firm could have a market or an asset which the company would beunable to gain through organic growth
- Organic growth too slow
- More difficult for firms to get new ideas

Question 11

Vertical integration

Answer 11

Integration of firms in the same industry but at different stages in the production process

Question 12

Advantages and disadvantages of vertical integration

Answer 12

Advantages:
- Increased potential for profit as the firm takes the potential profit from a larger part of the chain of production
- Less risks. Don’t need to worry about buyers not buying and suppliers not supplying
Disadvantages:
- Firms may have no expertise in the industry they took over

Question 13

Horizontal integration

Answer 13

Firms in the same industry at the same stage of production integrate.

Question 14

Advantages and disadvantages of horizontal integration

Answer 14

Advantages:
- Helps to reduce competition as competitor is taken out, increases market share
- Firms can specialise and rationalise, reducing the areas of the businesses which are duplicated.
- can grow in a market where it already has expertise
Disadvantages:
- Increase risk if that particular market fails, they have nothing to fall back on

Question 15

Conglomerate integration

Answer 15

Firms in different industries with no obvious connections integrate

Question 16

Advantages and disadvantages of conglomerate integration

Answer 16

Advantages:
- Useful for firms where there may be no room or growth in the present market
- he range of products reduces the risk for firm
Disadvantages:
- No expertise, can be damaging for the business

Question 17

What constrains business growth?

Answer 17

• Size of the market: not able to produce more as their goods will not be bought by consumers, niche markets
• Access to finance: if they do not make enough profit cannot, cannot grow
• Owner objectives: may not want their business to grow any further as they are happy with their profits
• Regulation: Regulations which prevent business from growing

Question 18

What is a demerger?

Answer 18

A demerger is a business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be dissolved.

Question 19

What are the impacts of demergers?

Answer 19

For workers: the goal of making the firm more efficient can lead to job losses. However can also lead to promotions

For businesses: concentrating on a smaller may enable it to be more efficient. Innovation as can specialise

For consumers: better products and cheaper prices for consumers with innovation

Question 20

What are the reasons for demergers?

Answer 20

• when the company has no real impact on each other anymore. Diseconomies of scale may occur
• value of the company/share price overall value is bought down
• focussed companies: if the company is focused more o the individual market, more efficient