Business growth Flashcards
What is a for profit organisation?
firm that aims to make profit
What is a non-profit organisation?
firm that operate commercially but aims to improvesocial welfare & environmental goals; profits are reinvested for social purposes
What is a private sector business?
firms owned by private investors rather than the state
What is a public sector business?
organisation owned and controlled by the state, e.g. the NHS, the Police, the Armed Forces
What is a sole trader?
A business owned and operated by an individual who retains all profits
What is a partnership?
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.
What is a private limited company?
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
What is a public limited company?
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.
What is the principal agent problem?
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
List reasons why some firms stay small
- 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
Why do some firms grow?
Successful businesses typically grow because there is an increase in the market demand for the product they are selling
What are types of business growth?
- Internal growth
- External growth
- Horizontal integration
- Vertical
- Backwards
- Forwards
- Conglomerate
- Friendly takeover
- Hostile takeover
What is internal growth?
also called organic growth – when a firm invests in new capacity to increase the business size
What is external growth?
business grows by acquiring another business via merger or takeover
What is horizontal integration?
a merger between two firms in the same industry at the same stage of production
What is vertical integration?
a merger between two firms at different stages of production in the same industry
What is backwards vertical integration?
business buys one of its suppliers e.g. car maker buys up a tyre company
What is forwards vertical integration?
business supplying a good merges with one of its buyers, e.g. car maker buys up a car dealership
What is conglomerate integration?
merger between two firms producing unrelated products
What is a friendly takeover?
Board of Directors of the target company recommend shareholders accept takeover bid
What is a hostile takeover?
Board of Directors of target company recommend shareholders reject the bid; predator company has tobuy 50% of shares in target company to take control
What are key constraints on business growth?
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
What are the advantages of growth of firms?
- 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
Why do some mergers and takeovers fail?
- 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
