Business growth

Question 1

What is a for profit organisation?

Answer 1

firm that aims to make profit

Question 2

What is a non-profit organisation?

Answer 2

firm that operate commercially but aims to improvesocial welfare & environmental goals; profits are reinvested for social purposes

Question 3

What is a private sector business?

Answer 3

firms owned by private investors rather than the state

Question 4

What is a public sector business?

Answer 4

organisation owned and controlled by the state, e.g. the NHS, the Police, the Armed Forces

Question 5

What is a sole trader?

Answer 5

A business owned and operated by an individual who retains all profits

Question 6

What is a partnership?

Answer 6

A business structure where two or more individuals own and manage the business together, sharing the profits. Commonly found in professional services such as lawyers and doctors.

Question 7

What is a private limited company?

Answer 7

A type of company whose shares are not publicly traded on a stock exchange. The ownership is limited to a specific number of shareholders, and shares are not available for public purchase

Question 8

What is a public limited company?

Answer 8

A company whose shares are listed on a public stock exchange, allowing them to be bought and sold by the general public. Shareholders have voting rights, typically exercised at the Annual General Meeting (AGM), but they are not directly involved in day-to-day business operations.

Question 9

What is the principal agent problem?

Answer 9

There may be a principal-agent problem when the shareholders (the principals) have different objectives from the managers (the agents). This is a form of information failure

Question 10

List reasons why some firms stay small

Answer 10

• Selling to a niche (very small, specialist) market (low PED or high YED for goods)
• Focus on good customer service/product
• differentiation/USP/quality/more personalised service/better communication with customers
• Enables more flexible response to changing market demand; allows more innovation
• Lack of resources/access to finance for expansion
• To avoid higher business taxes
• Allows access to informal/local labour markets
• May avoid being taken over
• Avoids internal diseconomies of scale

Question 11

Why do some firms grow?

Answer 11

Successful businesses typically grow because there is an increase in the market demand for the product they are selling

Question 12

What are types of business growth?

Answer 12

• Internal growth
• External growth
• Horizontal integration
• Vertical
• Backwards
• Forwards
• Conglomerate
• Friendly takeover
• Hostile takeover

Question 13

What is internal growth?

Answer 13

also called organic growth – when a firm invests in new capacity to increase the business size

Question 14

What is external growth?

Answer 14

business grows by acquiring another business via merger or takeover

Question 15

What is horizontal integration?

Answer 15

a merger between two firms in the same industry at the same stage of production

Question 16

What is vertical integration?

Answer 16

a merger between two firms at different stages of production in the same industry

Question 17

What is backwards vertical integration?

Answer 17

business buys one of its suppliers e.g. car maker buys up a tyre company

Question 18

What is forwards vertical integration?

Answer 18

business supplying a good merges with one of its buyers, e.g. car maker buys up a car dealership

Question 19

What is conglomerate integration?

Answer 19

merger between two firms producing unrelated products

Question 20

What is a friendly takeover?

Answer 20

Board of Directors of the target company recommend shareholders accept takeover bid

Question 21

What is a hostile takeover?

Answer 21

Board of Directors of target company recommend shareholders reject the bid; predator company has tobuy 50% of shares in target company to take control

Question 22

What are key constraints on business growth?

Answer 22

Market size: a firm will not grow if the demand is not there
Access to finance: a growing firm may need enough retained profit or a business loan to expand; the cost of finance may also affect its decision to grow
The objectives of the business owners: may not be profit-maximisers
Regulation: large firms may gain monopoly power which could be investigated by the competition authorities

Question 23

What are the advantages of growth of firms?

Answer 23

• Increased control of markets/resources
• Increase control of sales/customer base
• Gain internal economies of scale
• Helps ensure business survival/takeover competitors
• Helps gain expertise
• Increased productive and dynamic efficiency
• Spreads risk; allows diversification

Question 24

Why do some mergers and takeovers fail?

Answer 24

• Integrating different technology systems can be expensive/near impossible
• Share price may fall if fresh equity needs to be raised via a rights issue
• Clash of corporate cultures/personalities
• Businesses in competition to buy out a business may end up paying too much
• Bad/unlucky timing if the economic cycle changes course

Question 25

What is a demerger?

Answer 25

When a firm splits into separate firms

Question 26

Why do some firms demerge?

Answer 26

• To focus on its core business/core product
• To provide better quality service
• To become more specialised
• To reduce the risk of diseconomies of scale
• To raise money from the asset sale
• To avoid the attention of the competition authorities