Business Growth (3.2.1) Flashcards
What are the reasons for a why a firm seeks growth?
-Make more profit by increasing output
-Gain economies of scale
-Gain market power
-Reduce risk
-Increase earnings of managers
What is the difference between Organic (Internal) and Inorganic (External) Growth?
Organic(Internal) Growth- Expansion busing own resources
Inorganic (External) Growth- Mergers or Acquisitions. Two separate companies combining resources to gain a competitive advantage.
What’s and example of Organic (Internal) Growth?
Investing in new products, machinery etc.. to expand into more geographic areas, new markets etc…
What’s a real life example of Inorganic (External) Growth?
-Apple buying beats
-Kraft purchasing famous confectionary brands
What are the three sectors?
Primary
Secondary
Tertiary
What do each of the three sectors mean?
Primary-Extraction and production of raw materials
Secondary-collects raw materials from industries in the primary sector and processes them into consumable products
Tertiary-services sector of the economy
What’s Horizontal Integration?
When a firm merges with a firm from the same industry and same stage of production. E.g. Manufacturer A and B in the secondary sector merging
What is Backwards Vertical Intergration?
When a firm merges with same industry firm but different stage of production (backwards). E.g. Manufacturer A in secondary sector moves to primary sector and merges with Farm A
What is Forwards Vertical Integration?
When a firm merges with same industry firm but different stage of production (forwards). E.g. Manufacturer A in secondary sector moves to tertiary sector and merges with Supermarket A
What is Conglomerate Integration?
When a firm merges with a different industry and in a different stage of production. E.g. Manufacturer A in secondary sector merges with Airline A in the tertiary sector (different industry). This lowers he risk of an industry failing as if one industry suffers the other won’t
What are Economies of Scale?
As a business grows, it can increase its scale of output generating efficiencies that lower its average costs (cost per unit) of production. These efficiencies are called economies of scale which help large firm lower their costs of production
What are diseconomies of scale?
As a firm continues to increase its scale of output it will reach a certain point where its average costs (AC) will start to increase and the reasons for the increase in average costs are called diseconomies of scale
What are Internal economies of scale?
Internal economies of scale refer to cost advantages that arise from within a company itself. They occur as a result of the growth in the scale of production within the business and the firm can benefit from lower AC generated by factors inside the business
What are External economies of scale?
Occur when there is an increase in size of the industry in which the firm operates and the firm can benefit from lower AC generated by factors outside the business
What are some examples of Internal Economies of scale with explanation?
- Financial economies- Large firms often receive lower interest rates on lows as perceived as less risky compared to smaller firms which reduces AC
- Managerial economies- Occurs when larger firms can employ specialist mangers who are more efficient at certain tasks and reduce AC. Managers in smaller firms often have multiple roles and are less specialized
3.Marketing economies- Large firms spread cost of advertising and can reuse marketing materials in diff regions - Purchasing economies- Large firms buy raw materials in greater volumes and so get a bulk buying discount
5.Technical economies-Can use machinery at higher level of capacity thereby spreading cost of machinery over more units
6.Risk bearing economies- Firm can spread risk of failure by increasing its numbers of products
What are some examples of External Economies of scale with explanation?
- Geographic cluster- As industry grows can move closer to major manufacturers to cut costs
- Transport Links- Improved transport links developed around growing industries help get people to work
- Skilled Labour- Can lower cost of skilled labour
- Favorable legislation- Often generates significant reductions in AC as govs support certain industries to achieve wider objectives
What are the reasons for why a firm would want to remain small?
-Lack of finance for expansion
-Limited opportunities economies of scale
-Avoid diseconomies of scale
-Low levels of Demand
-Maintain flexibility
What are the Advantages of Organic (Internal) Growth?
-Less risky than External
-Maintain Control
-No clash of culture
What are the Disadvantages of Organic (Internal) Growth?
-Slower than external
-Could miss out on opportunities
-No new skills gained
What are the Advantages of Inorganic (External) Growth?
-Quick gains of EoS
-Quick gains of USP’s
-Removes competition
What are the Disadvantages of Inorganic (External) Growth?
-More expensive than Internal
-Managerial Conflict
-Potential clashes of culture
What are the Advantages of Horizontal Integration?
-Higher Market Share
-Removes competition
-No clash of culture
What are the Disadvantages of Horizontal Integration?
-Monopoly power
-Bad for consumers
-CMA may block
What are the Advantages of Backwards Vertical Integration?
-Sole access to Natural Resource
-Barrier to entry
-Lower unit costs
What are the Disadvantages of Backwards Vertical Integration?
-Low expertise
-Bad for competition
What are the Advantages of Forwards Vertical Integration?
-Sole access to retailer
-Barrier to entry
-Higher sales
What are the Disadvantages of Forwards Vertical Integration?
-Low expertise
-Bad for competition
What are the Advantages of Conglomerate Integration?
-Spreads risk
-Brand image carries over
-Lowers seasonality
What are the Disadvantages of Conglomerate Integration?
-High Risk
-Very Low expertise
-Low economies of scale
What is the Competition and Markets Authority (CMA)?
Branch of the Government in charge o controlling Merges and Acquisitions. This is to promote competition and consumer in markets and prevent monopoly power.
What are the constraints on growth?
-Size of the market
-Access to finance
-Owner’s objectives
-Regulation
-Economies of Scale
What are the three different levels of competition?
Local-Smaller, independent retailer, niche, service-based, lower levels of competition
National-Bigger, more well-known brands, more financial power, market leaders, compete with other national brands as well as local businesses
International-Global brands, huge financial power, Global market leaders, Compete with all domestic businesses as well as firms in each location
What are the problems arising from growth?
-Diseconomies of scale
-Internal communication strained
-Overtrading
