business growth Flashcards
reasons why businesses want to grow
economies of scale- decrease cost of production- sell more goods
larger firms have more shares of the market to control price and output
monopoly/ monopsony power to drive down prices or raw materials
more security e.g. retained profits
why a firm stays small
size of the market
informal market for labour- lower wages
access to finance
owner objectives
regulation
diseconomies of scale- more efficient
customers may want more personal services
niche market to make the good PED inelastic
principal agent problem meaning
when agent makes decisions for the principal but is inclined to act in their best interest rather than the principal’s
shareholders want to profit max but directors/ managers/ CEOs want to revenue max to activate bonuses
if they don’t meet the required profits they will get fired so they profit satisfice to satisfy the share holders
how to deal with principal agent problem
pay the CEO in shares of the company
profit related pay and not revenue related pay
performance related pay
private sector meaning
owned and run by individuals/ group of individuals
public sector meaning
owned or controlled by the government
profit maximisation meaning
maximise financial benefits for their shareholders
quantity is set where MC = MR
non profit firm goals
aim to maximise social welfare
no one owns shares
staffed by volunteers
money received through charities
when liquidated money goes to help people
organic growth meaning
firm increasing its size by increasing their output
e.g. under armour, whitbread, Lego
how can firms reach organic growth
putting profits back into the firm to increase spare capacity
borrowing money from banks
issuing shares
development and launch of new products
finding new markets
growing consumer demand through ads and marketing
pro of organic growth
firm can keep control over their business- reduces conflicts and hostile takeover
less risky
sustainable- does not build up debt as they use their own funds
con of organic growth
long term strategy
slow growth
firm may rely on strength of the market
external growth how its reached
achieved through mergers or acquisition
horizontal integration meaning
joining 2 firms in the same industry and the same stage of production
e.g. Sainsburys and asda
Facebook, WhatsApp, Instagram
pro of horizontal integration
exploit internal economies of scale (lowest part on LRAC)
cost saving
revenue synergies
wider range of products/ diversification
cheaper to buy well known brand than starting from scratch
con of horizontal integration
increases risk for the business if one of them fail
paying too much
cost rises as firm is larger so more managers
poor management
workers may leave
diseconomies of scale
vertical integration meaning
joining 2 firm in the same industry but at different stages of production
backwards vertical integration meaning
outlet takes over supplier
forwards vertical integration meaning
supplier takes over outlet
pro of vertical integration
access to raw materials
increases efficiency through gaining economies of scale
control of supply chain so lower unit cost and improved quality
can decrease competition through not selling raw materials to other competing firms
con of vertical integration
diseconomies of scale
barrier to entry for other firms so less competition
paying too much to join
more management so more cost - could lead to wrong info getting passed along or long time to make decisions
poor management
workers may leave
info gaps of other firm
conglomerate integration meaning
2 firms joining in completely unrelated markets
pro of conglomerate integration
reduces risk- different markets
more options to expand and get finance
both firms become stronger
gain more customers
con of conglomerate integration
firms do not have expertise in the market into which they buy
pay too much for firm
poor management
poor quality goods as focus is on may things
factors which limit firm growth
the size of the market
access to finance
owner objectives
regulation
demerger meaning
when a business is broken up into 2 ore more components
e.g. pepsi demerger of pizza hut, kfc and taco bell to focus on competition with coca cola
partial demerger meaning
the parent company retains a stake in the demerged business
reasons for demergers
focus on core business
lack of synergies
reduce the risk of diseconomies of scale
raise money
reduce attention of regulators
government intervention
impact of demergers on the business
employees
consumer
long term- higher returns as cost savings
increase specialisation- increase efficacy
make profit by selling business
new manager roles
lower prices
better quality
