Business growth Flashcards
why is profit maximisation the objective for firms
Reinvestment
- When firms maximize profits, they generate substantial financial resources.
- This enables reinvestment into various aspects of the business, such as capital upgrades, technological advancements, or R&D. For instance, technology firms like Apple use their large profits to innovate and maintain competitive edges.
- Reinvestment supports long-term growth, improves productivity, and enhances a firm’s ability to compete in domestic and international markets. This can also benefit consumers through higher-quality products and services.
Greater Dividends to Shareholders
- Profit maximization allows firms to pay higher dividends to their shareholders, which can attract further investment. - For example, companies like Unilever and Procter & Gamble maintain shareholder confidence by ensuring substantial returns.
- This encourages more investors, increases stock valuation, and secures a consistent source of capital for expansion.
Lower Costs and Prices for Consumers
- By maximizing profits, firms can focus on improving efficiency and reducing production costs. - Lower costs give firms the flexibility to lower prices while maintaining profit margins, benefiting consumers with affordable products.
- Lower prices can lead to increased demand, greater market share, and potentially higher overall profits, creating a virtuous cycle.
Rewarding Entrepreneurship
- Entrepreneurs undertake significant risks to establish and run businesses. Profit maximization ensures they are adequately compensated for their innovation, time, and resources. For example, small business owners reinvest profits into expanding operations and securing their livelihoods.
- Higher profits incentivize innovation and encourage others to pursue entrepreneurial ventures, supporting economic growth and job creation
who are shareholders
owners of a company
when does profit maximisation occur
when MARGINAL COSTS = MARGINAL REVENUE
why does profit maximisation occur at MC = MR
- 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
why might businesses choose not to profit maximise
- Firms may not have accurate information about where MC = MR, making it difficult to identify the profit-maximizing point.
- to avoid scrutiny - limit profits to avoid government regulation or public scrutiny, especially in industries where high profits might attract negative attention or accusations of monopolistic behavior
- key stakeholders being harmed - firms may not maximise profit if it harms key stakeholders, such as employees, customers, or suppliers, to maintain good relationships, ensure long-term sustainability, or avoid negative public perception.
- Businesses may not profit maximize due to the principal-agent problem, where owners’ interests differ from managers’.
- ## Owners focus on profit, while managers may prioritize job security or growth, leading to decisions that favor sales over profits.
what is profit satisficing
making just enough profit to keep shareholders happy
what is a stakeholder
any person who has an interest in how the business is running
examples of stakeholders
- shareholders
- managers
- consumers
- workers
- govt
environmental groups
which of the stakeholders may be negatively affected because of profit maximisation
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.
why is it bad to harm certain stakeholders
- 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.
why might companies want to maximise revenue
EOS
- By maximizing revenue, companies can increase output, potentially lowering average costs due to economies of scale.
- Lower production costs can increase competitiveness, allowing the firm to price more competitively or increase profit margins.
- Revenue maximization may support predatory pricing strategies to outlast competitors by temporarily reducing profits.
- By driving rivals out, a firm can eventually increase its market power and potentially raise prices.
Principal-Agent Problem
- Revenue growth can align with managers’ goals, who may be motivated by bonuses or promotions tied to revenue targets, even if not profit-maximizing.
- This can result in decisions that prioritize scale and visibility, though it may conflict with shareholders’ desire for profit maximization.
- reinvestment
what is predatory pricing
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
when does revenue maximisation occur
when MR = 0
when is there sales maximisation
when AC = AR
why might firms want to maximise sales
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.
other objectives of firms
- 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.
when are societal interests maxed
when P = MC
why might a firm choose to maximise corporate social responsibility
- 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
what is profit
total revenue - total costs
what are included in total costs
- physical / explicit costs (fixed and variable costs)
- implicit costs such as opportunity cost
difference between how economists view profits and how accountants view them
- economists consider both implicit and explicit costs
- accountants only consider explicit costs
what is normal profit
the minimum level of profit required to keep factors of production in their current use
what does subnormal / loss mean
when economic profit is lower than normal profit, when the profit being made is not enough to cover the opportunity cost of production
what is supernormal profit
- any profit that is made above normal profit
condition for normal profit
AR = AC
condition for supernormal profit
AR > AC
conditions for subnormal profit / loss
AR < AC
what is revenue
the money made from sales by a business
Price x quantity
what is average revenue
- total revenue / quantity
(so price)
what is marginal revenue
- change in total revenue / change in quantity
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
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
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
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
advantages of vertical integration
Control Over Supply Chain
- VI allows firms to control upstream suppliers or downstream distributors, ensuring a steady flow of inputs and products.
- This reduces dependency on third parties, minimizing risks of delays, shortages, or quality issues.
- improved access to key raw materials - by controlling suppliers, firms can secure a reliable and cost effective supple of essential raw materials , reducing the risk of price fluctuations and shortages
- removing suppliers/ gaining market intelligence- by aquiring suppliers, firms can reduce competition and gain valuable market insights, helping to innovate and respond better to market changes and customer demand
- eos
- profits
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.
What is horizontal integration?
joining/aquiring between two businesses in the same industry
advantages of horizontal integration
Economies of Scale (EOS):
By merging with or acquiring another firm at the same level of production, companies can expand their scale of operations, leading to lower average costs per unit due to more efficient use of resources, technology, and fixed assets.
Cost Savings from Rationalisation of the Business:
Horizontal integration allows firms to consolidate overlapping activities, such as administration, marketing, and distribution, eliminating redundancies and reducing operational costs.
Creates a Wider Range of Products:
Acquiring or merging with a company that offers complementary products helps firms diversify their product lines, improving their market offerings and reducing dependency on a single product or market segment.
Reduces Competition by Removing Key Rivals:
Horizontal integration reduces the number of competitors in the market, allowing the integrated firm to increase its market share and enjoy more pricing power, which can enhance profitability.
Increased Bargaining Power
The larger firm can exert greater influence over suppliers, leading to lower input costs.
Gains leverage in pricing negotiations with buyers, increasing profit margins.
Improved ability to enter new markets through established distribution networks and brand recognition.
More negotiating power with governments, regulatory bodies, and other stakeholders, enhancing business prospects.
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.
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.
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.
- 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. - 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. - 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.
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.
examples of conglomerates irl
Firms like Berkshire Hathaway operate across various industries, enhancing their reputation for stability and profitability.
- Amazon
- Meta
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
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
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.
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).
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).
Organic growth
Growth that occurs internally within the business, typically through increased sales, expansion of production, or entering new market
advantages of organic growth
- Organic Growth → Lower Risk → More Control Over Business Operations
Organic growth is typically less risky than external growth strategies like mergers or acquisitions → Since the business is expanding by utilizing its own resources, it retains more control over its operations and strategic direction → The company is less exposed to potential integration issues, cultural clashes, or unexpected liabilities that might arise from external growth strategies. - Organic Growth → Sustainable and Long-Term Expansion → Stronger Market Position
By focusing on internal development, companies are likely to experience sustainable growth over the long term → This type of growth allows for a steady increase in resources, customer base, and market share without overextending the business’s capabilities → It helps strengthen the company’s market position and competitive advantage, as growth is often based on solid foundations like brand loyalty, customer relationships, and quality improvements. - Organic Growth → Better Cultural Alignment → Easier Integration of New Staff
Since organic growth involves internal expansion, it typically results in better cultural alignment between the company and its new employees → There are fewer challenges related to integration compared to external growth (e.g., through mergers), as employees share the same values, goals, and work culture → This leads to higher employee satisfaction and smoother transitions during periods of expansion. - Organic Growth → Focused on Existing Strengths → Less Disruption
Companies that pursue organic growth typically build on their existing core competencies and expertise → This allows them to focus on what they do best, whether that’s innovation, customer service, or operational efficiency → As a result, organic growth tends to cause less disruption in the organization compared to acquisitions, which can lead to changes in the company’s structure, operations, and focus. - Organic Growth → Cost-Effective → Lower Financial Strain
Unlike mergers and acquisitions, organic growth typically does not require large capital outlays for purchasing other businesses or taking on significant debt → This makes it a cost-effective approach to expansion, as it avoids the financial strain and debt burden associated with external growth strategies → It allows the company to reinvest profits into further growth without overstretching its financial resources.
disadvantages of organic growth
Slower growth: It may take longer to achieve significant growth compared to other methods.
Limited resources: Growth depends on internal resources, which may be constrained.
there maybe be a long period between investment and return on investment
growth may be limited and is dependent on the reliability of sales forecasts
- may not benefit from eos
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.
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.
why do some firms choose to remain small chains
- 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. - 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. - 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. - 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.
why do some firms grow
- 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. - 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. - 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. - 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.
examples of demergers
costa and coca cola
- Pfizer selling their infant nutrition to nestle
- walmart selling asda in 2020
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
What are syngeries
the increased efficiencies in which firms gain as a result of integration
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.
