Business growth Flashcards
Why do some firms remain small while others grow?
Why Firms Grow:
ECONOMIES OF SCALE:
-the firm has decreased costs of production as output increases
-Sell more goods and make more revenue
-Larger profits
-e.g.Large manufacturing company
GREATER MARKET SHARE:
-ability to influence prices
-restrict the ability of other firms to enter the market helping to make profits in the long run
-Monopsony power - reduce costs by driving down the prices of their raw materials
DIVERSIFICATION:
-Reduce risk of making huge losses since they have areas of the market to fall back on.
MORE SECURITY:
-Build up assets and cash for financial difficulties
Why Firms Remain Small:
MARKET DEMAND:
-remain small if demand is limited
e.g. niche markets (small cafe)
REGULATIONS:
Regulatory barriers can hinder growth
e.g taxi companies vs big tech companies
ACCESS TO CAPITAL:
- Small startups may struggle to secure investment, while established companies with a proven track record can easily raise capital to expand.
Significance of the divorce of ownership from control: the principal-agent problem
-What
-Examples
-Solutions
-This problem arises when the interests of the owner (principal) and the manager (agent) of a firm do not align, leading to conflicts.
e.g
-Misaligned incentives: Managers may prioritise personal gain over maximising shareholder wealth
-Risk aversion:
Managers may avoid taking risks that could benefit the firm but endanger their job security.
RWE:
-Enron scandal of 2001
-Managers used loophole to hide billions in debt
-Shareholders filed lawsuit
SOLUTIONS:
-performance based pay
-monitoring
-e.g. bonuses
Private vs Public sector
PRIVATE:
-Owned and run by individuals
-Sole traders/PLCs
-Aim to generate profits
-Rely on investments, loans, revenues
PUBLIC:
-Owned and controlled by government
-Provide services without a profit motive
-Funded through taxes and gov budget
Profit vs non-profit organisations
PROFIT:
-generate income that exceeds expenses
-Rely on sales and investments for revenue - amazon
-Distribute profits to shareholders or re-invest it - corporations
NON-PROFIT:
-Prioritiser their mission over profits - charities
-Depend on donations and grants - charities/ red cross
-Reinvest their surplus into missions - museums
How businesses grow
ORGANIC GROWTH
ORGANIC GROWTH:
-When a firm relies on its own resources, increasing sales and revenue over time
-Include expanding into new markets, introducing new products/services, increasing market share
e.g LEGO
Advantages:
-Sustainable and controlled expansion
-Lower financial risk as firms rely on internal resources
-Builds on existing strength and expertise
Disadvantages:
-Slower growth
-Requires time and patience
How businesses grow
Forward and backward vertical integration
-Integration is growth through amalgamation, merger (firms join under common ownership), or takeover (one firm buys another)
-Vertical int: integration of firms in same industry but at different stages in the production process
-Backward: aquiring prducers/suppliers
-Forward: acquiring distribution channels/retailers
-e.g. Tesco takeover of booker in 2018
Advantages:
-Increased control over the supply chain
-Better coordination and quality control - less risks
-increased potential for profits - larger part of chain of production
Disadvantages:
-High upfront costs for aquisitions
-Firms may have no expertise in the industry they have taken over - car manufacturing vs selling
-Increased risk if the supply chain faces challenges
How businesses grow
Horizontal integration
-Where firms in the same industry and at the same stage of production integrate
-e.g Astrazeneca acquired ZS pharma in 2015
Advantages:
-Increased market share
-reduced competiton
-Has expertise in the market - specialise and rationalise
-Potential for economies of scale
Disadvantages:
-Increased risk if thatt particular market fails - nothing to fall back on
How businesses grow
Conglomerate integration
-Where firms in different industries with no obvious connections integrate
Advantages:
-Diversification of risk
-Capitalising on unrelated opportunities
Disadvantages:
-No expertise in other market - complexity
Constraints on business growth
SIZE OF THE MARKET:
-hard to achieve substantial growth if a market is small or saturated
-market size is limited by demand for the product
-Niche/ luxury markets are hard to grow
ACCESS TO FINANCE:
-Availabilty to capital, innvestments, loans is crucial for growth
-Banks might not lend to firms of high risk (small)
OWNER OBJECTIVES:
-Some may seek steady, sustainable growth
-Some might prefer rapid expansionn
-Willingness to take risks
REGULATION
-Regulations may hinder growth
-regulatory compliance costs and restrictions - affect expansion
-e.g. competition law prevents monopolies - over 25% market share
Demerger
-A strategy where a single business is broken down into two or more components, either to operate on their own, to be sold, or to be dissolved
-e.g. Pepsi announced demerger of pizza hut, taco bell, KFC - 1997
Reasons for demergers
VALUE OF THE COMPANY:
-Value of separate parts of the company might be worth more than combined
-Some parts of the business might be operating well and have potential to grow - overall value is brought down due to lack of success in other parts
FOCUS
-Can become more efficient and effective
-Focus on core competencies and strategies- to earn more profit
-Managers can improve skills and knowledge
ENHANCED EFFICIENCY
-Large companies often less efficient - diseconomies of scale
-Demergers lead to more streamlined operations and cost reduction
Impact of demergers on businesses
-More efficient, innovative
-Survive higher competition
-Can attract new investors
-May face challenges establishing operations and managements
-Risk if the size of the business is too small, economies of scale could be lost
Impact of demergers on workers
-Employees may experience changes in their roles/ responsibilities/ working conditions
-Separate firms may need their own managers - some people could get a promotion
Impact of demergers on consumers
-Gain from better products
-Cheaper prices
-Changes in branding/ customer service - can be good or bad
