Business growth Flashcards
1
Q
why is profit maximisation the objective for firms
A
💰 1. Retained profits for investment
Firms that maximise profits generate greater retained profits
→ which can be reinvested into the business (e.g. R&D, automation)
→ leading to higher productivity and innovation
→ allowing the firm to stay competitive and grow in the long run.
📈 2. Shareholder satisfaction and share price growth
Profit maximisation increases returns for shareholders
→ this boosts shareholder confidence and demand for shares
→ pushing up the firm’s share price
→ making it easier to raise finance in the future through equity.
🧲 3. Market dominance and pricing power
Higher profits allow firms to expand and gain market share
→ economies of scale can be achieved (e.g. lower average costs)
→ enabling them to undercut rivals or set higher prices
→ increasing market power and further boosting profits.
🛡️ 4. Survival and resilience
Firms that maximise profits build up financial reserves
→ providing a buffer during economic downturns or external shocks
→ helping the business survive in competitive or uncertain markets
→ reducing the risk of bankruptcy or closure.
🏆 5. Rewarding entrepreneurship and attracting talent
Profit maximisation incentivises entrepreneurs to take risks
→ as higher profits mean higher potential returns
→ and also allows the firm to offer attractive salaries or bonuses
→ attracting and retaining skilled labour and top executives.
2
Q
who are shareholders
A
owners of a company
3
Q
when does profit maximisation occur
A
when MARGINAL COSTS = MARGINAL REVENUE
4
Q
why does profit maximisation occur at MC = MR
A
- any point to the right means that costs are higher than revenue, reducing profit
- any point to the left is bringing in profit, but not the maximum amount, as any extra unit would generate more profit
5
Q
why might businesses choose not to profit maximise
A
- Satisficing behaviour (Owner-manager separation)
In firms with a divorce of ownership and control, managers may not aim for maximum profit →
Instead, they may satisfice — doing just enough to keep shareholders happy while meeting their own goals (e.g. job security, perks) →
This leads to less aggressive pricing or cost-cutting strategies →
So the firm may operate at sub-optimal efficiency, but maintain internal harmony.
- Long-term survival over short-term profit
Firms may avoid profit maximisation in the short term to focus on long-term stability →
For example, investing in R&D, staff training, or sustainable practices may lower profits now →
But these investments build resilience and adaptability in a changing market →
Leading to long-run profitability and survival rather than short-term wins.
- Avoiding regulatory scrutiny or bad publicity
If a firm earns excessive profits, it may attract attention from regulators or negative media →
This can lead to calls for price caps, windfall taxes, or investigation →
Firms might deliberately limit pricing power or profits to appear fair or competitive →
This helps maintain a positive brand image and avoids government intervention.
- Ethical or social objectives
Social enterprises or mission-driven firms may value social outcomes over pure profit →
They might focus on fair wages, sustainability, or local employment even if it’s costly →
This enhances stakeholder trust and customer loyalty →
Which can translate into consistent long-term revenue, even with lower margins.
6
Q
what is profit satisficing
A
making just enough profit to keep shareholders happy
7
Q
what is a stakeholder
A
any person who has an interest in how the business is running
8
Q
examples of stakeholders
A
- shareholders
- managers
- consumers
- workers
- govt
environmental groups
9
Q
which of the stakeholders may be negatively affected because of profit maximisation
A
consumers - raising prices to increase revenue can lead to consumers paying more for goods and services
- To reduce costs, firms may cut corners on product quality, leading to inferior goods for consumers
- workers/trade unions - Firms may keep wages low to minimize costs and maximize profits, which can hurt workers’ earnings.
- might reduce staff or automate jobs to cut labor costs, leading to layoffs or increased job insecurity.
- To reduce expenses, firms might cut spending on employee benefits, safety, or training, leading to poor working conditions
government - Profit maximization can lead to wage disparities and wealth concentration, increasing income inequality
environmental groups - Profit-maximizing firms may cut corners on environmental protection measures, leading to higher pollution and resource depletion.
10
Q
why is it bad to harm certain stakeholders
A
- Consumers: Harmed consumers may lose trust in the firm, leading to decreased sales and brand loyalty.
- Workers/Trade Unions: Unhappy workers can lead to lower productivity, strikes, or high turnover, affecting business operations.
- Governments: Poor relations with governments can result in stricter regulations or penalties, increasing costs for the firm.
- Environmental Groups: Negative environmental impacts can damage the firm’s reputation, leading to boycotts or costly legal actions.
11
Q
why might companies want to maximise revenue
A
- To gain market share
→ Maximising revenue often involves lowering prices
→ This can attract more customers from competitors
→ The firm’s market share increases
→ Greater market share can lead to pricing power in the long term - To benefit from economies of scale
→ Higher revenue means higher output levels
→ This allows the firm to spread fixed costs over more units
→ Unit costs fall, increasing profitability over time
→ It becomes harder for smaller firms to compete - To satisfy stakeholder objectives
→ Some firms prioritise revenue to meet growth targets set by shareholders
→ Higher revenue growth may attract more investment
→ This improves access to finance for future expansion
→ The business becomes more financially stable and scalable - To weaken or eliminate rivals
→ Revenue maximisation strategies like predatory pricing can drive competitors out
→ This reduces competition in the market
→ The firm may later raise prices once rivals have exited
→ This leads to long-term profit maximisation
12
Q
what is predatory pricing
A
Occurs when a firm sets its prices below average cost (often below variable cost) in the short run to eliminate competitors from the market. Once rivals exit or are significantly weakened, the firm increases prices to recoup losses and establish dominance, often leading to reduced competition and potentially higher consumer prices in the long run.
- Amazon has been accused of predatory pricing in the e-book market. It allegedly sold e-books at a loss to undercut competitors like Barnes & Noble and smaller independent bookstores. By offering these lower prices, Amazon attracted a significant share of the market, weakening its competitors who could not match its prices due to lower economies of scale
13
Q
when does revenue maximisation occur
A
when MR = 0
14
Q
when is there sales maximisation
A
when AC = AR
15
Q
why might firms want to maximise sales
A
economies of scale:
- By maximising sales, firms increase their production levels, which can lead to lower average costs per unit due to bulk purchasing and operational efficiencies.
- can enhance competitiveness and improve profit margins in the long run as fixed costs are spread over a larger output
- limit pricing:
- Firms may set prices low enough to maximize sales and deter potential competitors from entering the market by signaling that they cannot sustain profitability at higher prices.
- established firms can maintain market dominance and reduce the threat of new entrants
- Principal - Agent problem:
- Managers might prioritize maximizing sales to demonstrate business growth, which can lead to performance bonuses or job security, regardless of the firm’s profitability.
- This behavior can result in a focus on immediate sales growth rather than long-term profit maximization, which may not align with shareholders’ interests.
- Flooding the market:
- Firms might aim to maximize sales by flooding the market with products to increase brand visibility and consumer recognition.
- A strategy focused on high sales volume can generate significant cash flow, which can be reinvested into the business for future growth.
- By saturating the market, firms can limit the space available for competitors, effectively reducing competition and establishing stronger market control.
16
Q
other objectives of firms
A
- Survival;
- In highly competitive or volatile markets, firms may prioritize survival over profit to endure fluctuations and avoid bankruptcy.- Firms may adopt a survival strategy during challenging economic conditions to navigate short-term obstacles, aiming for sustainable practices that ensure their future success.
- societal interest
- Firms may aim to maximize societal interests to enhance their reputation and brand loyalty, attracting consumers who value ethical practices.
- firms can foster long-term sustainability,
- Focusing on societal interests helps build positive relationships with stakeholders, including customers, employees, and regulators, which can lead to increased support and reduced conflict.
17
Q
when are societal interests maxed
A
when P = MC
18
Q
why might a firm choose to maximise corporate social responsibility
A
- By maximizing corporate social responsibility (CSR), firms improve their public image, attracting customers who prefer to support socially responsible companies.
- Focusing on CSR helps firms anticipate and mitigate risks related to regulatory changes and public backlash, leading to greater long-term stability.
- Firms that prioritize CSR can enhance employee morale and retention, as workers are often more motivated to contribute to an organization that aligns with their values and promotes social good
19
Q
what is profit
A
total revenue - total costs
20
Q
what are included in total costs
A
- physical / explicit costs (fixed and variable costs)
- implicit costs such as opportunity cost
21
Q
difference between how economists view profits and how accountants view them
A
- economists consider both implicit and explicit costs
- accountants only consider explicit costs
22
Q
what is normal profit
A
the minimum level of profit required to keep factors of production in their current use
23
Q
what does subnormal / loss mean
A
when economic profit is lower than normal profit, when the profit being made is not enough to cover the opportunity cost of production
24
Q
what is supernormal profit
A
- any profit that is made above normal profit
25
condition for normal profit
AR = AC
26
condition for supernormal profit
AR > AC
27
conditions for subnormal profit / loss
AR < AC
28
what is revenue
the money made from sales by a business
Price x quantity
29
what is average revenue
- total revenue / quantity
(so price)
30
what is marginal revenue
- change in total revenue / change in quantity
31
characteristics of a perfect competition market
- many buyers and sellers
- firms sell homogeneous goods
- firms are price takers - they dont set price
- no barriers to entry or exit
- perfect information
32
when MR = 0 , why is total revenue maximised
- marginal revenue shows the additional revenue from selling one more u it
- when MR = 0, total revenue is maximised since no extra revenue is gained from selling more
- beyond MR = 0, TR is negative as more units are sold at lower price
33
What is vertical integration
- is business strategy where a company expands its operations by acquiring/controlling other businesses that are either upstream or downstream in the supply chain
34
what is forward vertical integration
what is backward vertical integration
forward - an integration of business that is closer to final consumers. eg shell buying first utility
backward - business integration that is closer to the raw materials in the supply chain
35
advantages of vertical integration
🔗 1. Greater control over supply chain
The firm integrates with a supplier (backward integration) or distributor/retailer (forward integration)
→ This ensures consistent input quality and delivery times
→ Reduces risk of supply disruptions or delays
→ Improves reliability and efficiency of production and sales
🔗 2. Lower transaction costs
By internalising parts of the supply chain
→ The firm avoids repeated contracting, negotiation, and enforcement costs
→ Reduces dependency on external firms and potential exploitation
→ Leads to higher operational efficiency and cost savings in the long run
🔗 3. Improved profit margins
Taking over suppliers or retailers allows the firm to capture more stages of value creation
→ Cuts out the profit margins that would go to third parties
→ Leads to lower average costs and/or higher profit margins per unit sold
→ Boosts overall profitability and competitiveness
🔗 4. Increased market power
Controlling multiple stages of the supply chain
→ Increases barriers to entry for potential competitors
→ Enables the firm to exert greater influence over pricing and distribution
→ Enhances strategic control in the market, potentially leading to greater long-term survival
36
disadvantages of vertical integration
Coordination Challenges:
Managing multiple stages of production and distribution can be complex and inefficient, leading to communication breakdowns and operational difficulties.(dEOS)
Increased Control, but Less Flexibility:
While vertical integration offers greater control, it can reduce flexibility, making it harder for firms to switch suppliers or adapt quickly to market changes.
High Capital Costs:
Vertical integration often requires significant investment in acquiring new businesses or assets, which can strain a company's financial resources.
Reduced Focus on Core Competencies:
Diversifying into different stages of the supply chain may distract firms from their core business, leading to inefficiencies and reduced performance in their primary area of expertise.
Regulatory Risks:
Vertical integration can attract regulatory scrutiny, especially if it leads to anti-competitive practices or market dominance, which may result in legal challenges and fines.
37
What is horizontal integration?
joining/aquiring between two businesses in the same industry
38
advantages of horizontal integration
Increased market share
Horizontal integration involves merging with or acquiring firms in the same industry or market.
This leads to a larger customer base and increased market share.
With more market control, the firm can exert more influence over pricing and reduce competitive pressure.
This results in potentially higher profits as the firm has a more dominant position in the market.
Economies of scale
Horizontal integration allows the firm to combine resources and reduce duplication of operations.
This consolidation can lead to cost savings through economies of scale, such as bulk purchasing, sharing distribution networks, or consolidating management functions.
With reduced average costs, the firm can potentially lower prices or increase profitability.
These savings contribute to improved overall competitiveness and financial health.
Reduced competition
By acquiring or merging with competitors, horizontal integration reduces the number of firms in the industry.
With fewer competitors, the firm can control more of the market, reducing price wars and competitive pressures.
This allows the firm to focus on long-term strategy rather than constantly responding to competition.
Reduced competition can lead to higher profit margins and increased pricing power.
Diversification of products or services
Horizontal integration often involves acquiring firms that offer complementary products or services within the same market.
The firm can diversify its offerings, thereby attracting a wider range of customers and expanding its market reach.
This diversification reduces reliance on a single product line, helping the firm manage risks associated with market fluctuations or changes in consumer preferences.
Offering a broader range of products enhances the firm’s ability to cross-sell and increase sales.
39
disadvantages of horizontal integration
Diseconomies of Scale:
As firms grow larger through horizontal integration, they may experience inefficiencies, such as increased managerial complexity, communication issues, and bureaucratic delays, which can increase average costs rather than reduce them.
Reduced Flexibility:
Larger firms often struggle to adapt quickly to changes in market conditions or consumer preferences, as decision-making becomes slower and operations more rigid due to the scale and scope of the combined business.
Risk of Destroying Shareholder Value:
Mergers and acquisitions may fail to deliver the anticipated synergies, leading to integration challenges, cultural clashes, or overvaluation, ultimately resulting in a decline in the firm's profitability and shareholder value.
Risk of Attracting Scrutiny from Competition Authorities:
Large horizontal mergers that significantly reduce competition in the market can attract the attention of regulators, potentially leading to investigations, fines, or even the blocking of the deal, which can delay or nullify the expected benefits.
40
what is conglomerate integration
Conglomerate integration is a type of merger or acquisition where two companies that operate in entirely different industries or markets come together.
41
advantages of conglomerate integration
Risk-Bearing Economies of Scale → Reduced Volatility → More Stable Revenue → Long-Term Growth
A firm operating in multiple industries is less exposed to market-specific risks, meaning that downturns in one industry are offset by performance in others → This leads to more stable revenue streams, ensuring the company can maintain profitability even during economic downturns → The reduced financial risk allows the firm to take a long-term strategic approach, rather than making short-term survival decisions → Over time, this stability encourages investment in expansion, innovation, and workforce development, leading to sustained growth.
2. Increased Market Power → Reduced Dependence on a Single Market → Stronger Brand Recognition → Competitive Advantage
Conglomerates operate across diverse markets, which reduces their reliance on a single sector or consumer base → By leveraging their brand presence in one industry, they can expand more easily into others, giving them a competitive edge over standalone firms → This increased brand recognition makes it easier for them to attract new customers and negotiate better deals with suppliers and distributors → Over time, reduced competition and increased brand loyalty lead to higher pricing power and greater profitability.
3. Cross-Industry Synergies → Cost Savings → Higher Efficiency → Improved Profit Margins
Conglomerates can utilize shared resources such as marketing, distribution networks, and research and development (R&D) facilities across different industries → This results in economies of scope, meaning they can reduce costs per unit of output by spreading fixed costs across multiple business units → For example, a conglomerate with a strong logistics network in retail can use the same infrastructure for its manufacturing division, lowering transportation and storage costs → These cost savings translate to higher profit margins, allowing the company to reinvest in expansion and innovation.
4. Better Access to Finance → Stronger Creditworthiness → Easier Investment in Growth and Innovation
Due to their diversified revenue streams, conglomerates appear less risky to banks and investors, as they are not reliant on a single market → This enhances their credit rating, making it easier to secure loans at lower interest rates or attract equity investment → With greater access to finance, conglomerates can fund large-scale research projects, acquire new firms, and expand into emerging markets → This ability to consistently reinvest in new technologies, production processes, and talent development ensures long-term competitive advantage.
42
disadvantages of conglomerate integration
Higher Risk of Failure
- Diversifying into unrelated markets spreads resources thin and exposes the company to more risks.
- If one sector faces a downturn, the firm’s overall profitability could be jeopardized, especially if the new venture requires significant capital.
- This could lead to financial instability or insolvency, undermining the core business’s stability
Managerial Complexity
- Managing diverse operations across unrelated industries adds layers of complexity and increases administrative burdens.
- A conglomerate operating in technology and retail might require vastly different strategies and expertise, leading to communication issues and delays in decision-making.
- This could slow responses to market changes, decreasing competitiveness and profitability in each sector
Diversification Dilution
- Conglomerate integration involves entering unrelated markets, which can dilute the firm’s focus and expertise.
- A manufacturing firm integrating with a financial services provider may lack the knowledge to operate efficiently in the new industry. The lack of synergy could lead to mismanagement and inefficiencies.
- This increases operational costs and reduces profitability, potentially leading to losses in both the original and newly integrated markets.
- general deos like communication
-
43
examples of conglomerates irl
Firms like Berkshire Hathaway operate across various industries, enhancing their reputation for stability and profitability.
- Amazon
- Meta
44
what is organic growth
- when growth is internal
- borrowing from banks rather than finance from a takeover
- if the business has grown naturally, without a takeover
45
why might a business choose to remain small
Niche Market Focus
- A small business may cater to a specialized market with limited demand. Scaling up could lead to oversupply or dilution of the brand's value.
- This allows the business to sustain profitability by serving a dedicated customer base that values exclusivity
Avoiding Diseconomies of Scale
- Expanding can increase complexity and costs, reducing efficiency. By remaining small, the business avoids issues like management difficulties or operational inefficiencies.
- This ensures higher productivity and cost-effectiveness while maintaining quality standards.
Regulatory and Tax Advantages
- Small businesses may benefit from simplified tax regimes or exemptions from regulations that apply to larger firms.
- This reduces administrative burden and operational costs, allowing the business to compete effectively.
Limited Capital or Risk Aversion
- Owners may lack the financial resources for growth or prefer to avoid the risks of borrowing or external investment.
- The business can sustain itself within its financial means, minimizing the likelihood of insolvency.
Customer Relationships and Loyalty
- Small businesses often foster personalized interactions with customers, creating strong - This ensures a steady revenue stream and protects the business from competitive pressures
46
Why do some firms tend to remain small, while others grow?
Remaining small:
Niche market: Small firms may cater to specialized markets and not need to expand.
Limited resources: Smaller firms often have fewer resources for growth.
Risk aversion: Small firms may prefer to stay small to reduce business risks.
Owner’s preference: Some owners may prefer managing a small operation for personal reasons (e.g., control).
Growth:
Economies of scale: Larger firms can lower their per-unit costs by producing at a larger scale.
Market expansion: Growing firms may enter new markets or diversify their products to increase revenue.
Access to more capital: Larger firms may have better access to finance for growth.
47
What is the distinction between public and private sector organizations
Private sector: Firms and organizations owned and operated by private individuals or companies. The primary goal is usually to maximize profit (e.g., retail businesses, tech companies).
Public sector: Organizations owned and operated by the government or state, which often provide essential services and may not be profit-driven (e.g., NHS, public schools, government departments).
48
What is the distinction between profit and not-for-profit organizations?
Profit organizations: Firms that aim to generate profit for their owners or shareholders. Examples include corporations and privately-owned businesses.
Not-for-profit organizations: Organizations that aim to achieve social, cultural, or environmental objectives rather than to make a profit. Any surplus revenue is reinvested into the organization's mission (e.g., charities, NGOs, social enterprises).
49
Organic growth
Growth that occurs internally within the business, typically through increased sales, expansion of production, or entering new market
50
advantages of organic growth
🌱 Less Risky Than External Growth
🔗 Organic growth happens through internal expansion (e.g., selling more products, opening new branches) rather than mergers or takeovers
🔗 This means firms grow at a manageable pace, maintaining control over their operations and culture
🔗 There's less risk of culture clashes, bad takeovers, or integration problems compared to external growth
🔗 As a result, organic growth is often safer and more sustainable for the business in the long term ✅
🛡️ Maintains Firm’s Ownership and Control
🔗 Growing internally allows the original owners or managers to retain full control of the business
🔗 There’s no need to share ownership with other companies or new stakeholders, avoiding conflicts of interest
🔗 Decision-making remains quick, aligned with the firm's vision, and focused on long-term objectives
🔗 This helps the business stay true to its values and operate more independently
💸 Cheaper Than Mergers and Acquisitions
🔗 Organic growth usually involves reinvesting profits or using internal resources to expand
🔗 It avoids the high upfront costs of mergers (like legal fees, paying premiums, or restructuring costs)
🔗 With fewer financial risks, the firm can grow steadily without taking on large debts or risking overextension
🔗 This leads to healthier finances and stronger balance sheets over time 💵
🤝 Easier to Build Customer Loyalty
🔗 Organic growth tends to focus on improving existing products, building brand reputation, and developing relationships with customers
🔗 A steady approach allows the firm to listen to customer feedback and adapt products and services carefully
🔗 This can enhance customer loyalty as consumers associate the brand with consistency, reliability, and trust
🔗 Strong customer loyalty can create a competitive advantage that’s hard for rivals to replicate
51
disadvantages of organic growth
Slower Expansion:
Organic growth depends on reinvesting profits and internal resources.
This leads to gradual growth over time.
As a result, the company might lag behind competitors who expand faster.
Slow growth may reduce the company's market share and competitive edge.
Limited Access to Resources:
Organic growth relies on the company’s own resources (capital, expertise, etc.).
This can limit the scope of expansion if resources are limited.
In some cases, external investment or acquisitions could speed up growth.
Without such resources, the company could struggle to expand into new markets.
Vulnerability to Market Fluctuations:
Companies focusing on organic growth are more susceptible to market downturns.
Lower consumer demand or economic recessions can hurt expansion plans.
These market fluctuations can delay or halt growth entirely.
It may take longer to recover compared to businesses that diversify quickly through mergers or acquisitions.
Missed Opportunities:
Organic growth might cause companies to miss out on potential strategic acquisitions.
Competitors who engage in acquisitions can diversify their portfolios rapidly.
This creates opportunities for these competitors to outpace organic growth companies.
Without an acquisition strategy, the company may not capitalize on growth opportunities as efficiently.
52
What are the constraints on business growth?
Size of the market: The firm can only grow so much within a given market before it reaches its saturation point.
Access to finance: Limited access to funding can constrain a firm's ability to expand or invest in new projects.
Owner objectives: Owners may not want to expand aggressively due to personal preferences (e.g., maintaining control or avoiding risk).
Regulation: Government rules, such as antitrust laws, environmental regulations, or industry-specific constraints, can limit the firm's growth opportunities.
53
What are the reasons for demergers?
1️⃣ Loss of Synergies → Costs May Outweigh Benefits → Lower Efficiency → Decision to Demerge
Synergies from integration may no longer exist or may prove difficult to realise in practice.
This could lead to higher-than-expected costs, poor integration, or conflicting management styles.
As a result, firms may become less efficient or productive than they would be as separate entities.
A demerger allows each part to operate independently and focus on its core operations.
2️⃣ Focus on Core Competencies → Increased Efficiency & Profitability → Better Strategic Direction
By separating, each business unit can focus on its own strengths and objectives.
This allows for more tailored strategies, better resource allocation, and a clearer mission.
As each entity focuses on what it does best, efficiency and profitability can improve.
3️⃣ Unlock Shareholder Value → Higher Transparency → Investors Better Understand Each Business → Higher Valuations
A large merged firm may be difficult to value accurately, especially if it operates in multiple unrelated industries.
Demerging provides greater transparency and allows investors to assess each business separately.
If the market values the parts higher than the whole, this can unlock shareholder value and increase overall investment appeal.
4️⃣ Regulatory Pressure or Antitrust Laws → Forced Separation → Increased Competition
Regulators may require firms to break up if a merger has reduced market competition or created a monopoly.
Demerging restores competitive conditions in the market, preventing abuse of market power.
This ensures compliance with competition law and maintains fair pricing and innovation incentives.
5️⃣ Cultural or Operational Clashes → Reduced Productivity → Improved Performance as Separate Units
Differences in corporate culture or management style post-merger can reduce cooperation and hinder decision-making.
These internal inefficiencies can cause employee dissatisfaction and declining productivity.
Demerging allows each unit to rebuild its internal processes, boosting morale and performance.
54
why do some firms choose to remain small chains
1. Niche Market Focus
The firm specializes in unique or niche products/services with limited demand.
Larger firms may not find it profitable to compete in this niche due to lower economies of scale.
This allows the small firm to charge premium prices and maintain customer loyalty.
Expanding could dilute the brand identity and reduce the firm's competitive advantage.
2. Lack of Economies of Scale
Certain industries do not benefit much from large-scale production (e.g., artisanal goods, local services).
Expanding production could lead to higher operational complexity and diseconomies of scale.
Fixed costs may rise disproportionately, reducing profitability instead of increasing it.
Staying small helps maintain cost efficiency and personalized service.
3. Barriers to Expansion
Limited access to finance makes it difficult to fund expansion (e.g., lack of investor interest or high borrowing costs).
Regulatory constraints such as strict licensing, zoning laws, or labor restrictions may prevent scaling up.
Difficulties in hiring and managing a larger workforce might discourage growth.
Increased competition from larger firms may make expansion unprofitable or risky.
4. Owner Preferences and Business Culture
Some business owners prioritize work-life balance over growth and profitability.
Expansion often means losing control of the business, which many entrepreneurs want to avoid.
A small size allows for personal relationships with employees and customers, maintaining quality control.
The firm may prefer to operate in a specific geographic area rather than compete nationally or internationally.
55
why do some firms grow
1. Economies of Scale
As a firm expands production, average costs fall due to spreading fixed costs over higher output.
This allows the firm to reduce prices, making it more competitive and increasing market share.
Lower costs mean higher profit margins, which can be reinvested into further expansion.
Continuous cost reductions create a barrier to entry for smaller firms, helping the firm maintain dominance.
2. Growth enables a firm to increase its market share, reducing competition and gaining pricing power.
With fewer competitors, the firm can set higher prices and achieve supernormal profits.
Stronger brand recognition makes consumers more likely to choose their products over smaller competitors.
Greater market influence allows firms to negotiate better deals with suppliers, further reducing costs.
3. Expansion allows firms to operate in multiple markets, reducing reliance on a single product or sector.
If one market declines, revenue from other business areas can compensate, making the firm more stable.
Diversification into new product lines or geographic regions increases revenue streams.
Large firms are better able to withstand economic downturns due to their diversified income sources.
4. Access to More Finance
Larger firms have greater credibility and financial strength, making it easier to secure funding from banks or investors.
They can raise capital through stock markets (IPOs) or issuing bonds, giving them a financial edge.
Increased investment allows them to fund research & development, leading to innovation and competitive advantage.
Strong financial backing enables firms to acquire smaller competitors, accelerating growth even further.
56
examples of demergers
costa and coca cola
- Pfizer selling their infant nutrition to nestle
- walmart selling asda in 2020
57
what is a demerger
when a firm decides to split into two or more separate firms
- this can be done through the distribution of shares in the new companies to the existing shareholders of the parent company
58
What are syngeries
the increased efficiencies in which firms gain as a result of integration
59
impacts of demergers
🔹 1. Greater Focus on Core Activities → Increased Specialisation → Improved Efficiency → Higher Profitability
After a demerger, each firm can concentrate on its specific market or industry.
This allows them to specialise in what they do best without distractions.
Specialisation can lead to better decision-making and resource allocation.
This boosts efficiency and profit margins over time.
🔹 2. Improved Transparency → Easier for Investors to Value Firms → Increased Shareholder Confidence → Share Prices May Rise
Each business unit is now valued separately, rather than being part of a complex group.
Investors can make more informed decisions about performance and growth potential.
This builds confidence among investors.
Increased demand for shares could lead to a rise in share prices.
🔹 3. Redundancy in Support Functions → Duplication of Roles → Short-Term Rise in Costs → Fall in Overall Efficiency
Demerged firms may need separate finance, HR, and legal departments, for example.
This leads to duplicated costs that didn’t exist under one umbrella.
In the short run, this can increase operational expenses.
It may reduce cost-efficiency until new structures are optimised.
🔹 4. Loss of Economies of Scale → Higher Unit Costs → Reduced Price Competitiveness → Market Share May Fall
As a single large firm, the business could buy in bulk or share infrastructure.
After the split, each firm might face higher per-unit costs.
This can weaken pricing power compared to larger rivals.
Firms may then lose customers and market share if they raise prices.
60
why do firms shutdown
📉 Losses from High Fixed Costs
🔗 If a firm is consistently experiencing losses and its total revenue does not cover its fixed costs, it may decide to shut down
🔗 When fixed costs (e.g., rent, machinery, insurance) cannot be avoided in the short run and revenue is insufficient to cover even these costs, continuing operations may result in a larger financial loss
🔗 In such situations, the firm faces a decision: whether to shut down temporarily to avoid worsening its financial position or to continue operating at a loss
🔗 If losses persist and the firm cannot cover its variable costs or see a path to profitability, it may choose to shut down in order to stop incurring additional losses 🏚️💸
⚖️ Inability to Cover Variable Costs
🔗 If a firm's revenue is not enough to cover its variable costs (e.g., wages, raw materials), it will likely choose to shut down in the short term
🔗 In the short run, if a firm cannot cover variable costs, it is better to cease production rather than continue operating and losing money on each unit produced
🔗 Shutting down allows the firm to avoid further losses, since continuing operations under these conditions only adds to the financial strain
🔗 As a result, firms that cannot generate enough revenue to cover their variable costs will likely shut down temporarily until they can recover financially or market conditions improve 🛑💵
📊 Decline in Demand
🔗 A significant drop in demand for a firm's products or services can lead to a decision to shut down if the firm cannot adjust quickly enough
🔗 If there is a sustained decrease in demand for the firm's product due to factors such as market saturation, changes in consumer preferences, or competition, revenue may fall below the break-even point
🔗 As sales continue to decline, the firm may realize it is unable to cover costs or even maintain its position in the market
🔗 In this case, shutting down may be the most viable option to avoid continuing to lose money in the long run 🛑📉
🏆 Increased Competition
🔗 Increased competition, particularly from low-cost or more efficient competitors, can drive firms out of business if they cannot keep up with market prices
🔗 If a firm is unable to match the costs or pricing strategies of its competitors, it may lose its competitive edge and experience falling profits
🔗 In highly competitive industries, firms that cannot offer lower prices or better products may find themselves with declining market share, leading to financial strain
🔗 If the firm is unable to adapt, it may decide to shut down due to the inability to compete effectively 🔄🏁
🛠️ Technological Obsolescence
🔗 Firms that fail to adapt to new technologies or innovations in their industry may find themselves at a competitive disadvantage, leading to a decline in profitability
🔗 When production processes become outdated or unable to keep pace with technological advancements, firms face higher costs or lower efficiency, impacting their ability to compete in the market
🔗 In industries where technological progress is rapid, companies that do not invest in innovation may be forced to shut down as they cannot maintain cost-effective operations or attract customers
🔗 As a result, firms that are unable or unwilling to adopt new technologies may shut down when they can no longer compete effectively in the market 💻🛑
🏛️ Regulatory or Legal Issues
🔗 Changes in regulations or legal restrictions can make it impossible for firms to continue operating if they are unable to comply or afford the costs of compliance
🔗 Increased taxes, environmental regulations, or licensing requirements can impose significant additional costs on firms, especially small businesses or those operating on thin margins
🔗 If the firm cannot afford to meet these new regulatory demands, it may be forced to shut down or risk legal penalties
🔗 Therefore, firms that face regulatory pressure and cannot adapt to new laws may choose to shut down to avoid further financial damage 🏛️📜
💳 Financial Insolvency
🔗 Firms that accumulate significant debt and cannot manage their financial obligations may reach a point of insolvency, where they are no longer able to pay creditors or sustain operations
🔗 When a firm is unable to secure additional funding, restructure its debt, or generate sufficient revenue to cover its liabilities, it may be forced to shut down or enter bankruptcy
🔗 Insolvency often results from a combination of poor financial management, external market factors, or the firm's inability to adjust to changing conditions
🔗 If the firm is unable to restructure its finances or secure necessary capital, it will likely be forced to shut down permanently 🏦🚫
💼 Lack of Profitability
🔗 The primary reason firms shut down is the lack of profitability over time
🔗 If a firm is consistently unable to generate profits, despite attempts to cut costs, increase prices, or improve efficiency, it may reach a point where continuing operations becomes unsustainable
🔗 When profits do not cover costs, and the firm cannot recover, shutting down becomes the only option to prevent continued losses
🔗 Therefore, firms that are unable to make a profit over an extended period of time may choose to shut down to stop the bleeding and avoid further financial harm 💔💰
