Business growth Flashcards
name the key motivations for business growth
- economies of scale (lower average unit costs)
- market power
- improve shareholder returns from higher operating profit
- reduce the risk of a hostile takeover
- pursuit of managerial objectives
- synergy effects i.e. from having bigger sales platforms
describe the profit motive
think about what profit is used for
- businesses grow to provide better returns for shareholders
more profit - higher dividends
describe the cost motive
- economies of scale increase the productive capacity of the business leading to lower average costs.
- they help to raise profit margins at a given market price
describe the market power motive
- firms may wish to increase market dominance (market share) giving them pricing power
- market power can be used as a barrier to entry in the long run
- large businesses can build & take advantage of monopsony power
what is the difference between monopoly and monopsony?
monopoly - 1 seller in the market
monopsony - 1 buyer in the market
define the risk motive
- diversification across products & markets helps to reduce/spread investor risks
moving into new markets with new products help t reduce/spread risk
define the managerial motive
- managers whose objectives differ might accelerate business expansion ahead of short run profit maximisation
define organic business growth
growth from “within the business” e.g. new products; expansion into new markets - (diversification)
define external business growth
growth from mergers & takeovers
define takeover
where one business acquires a controlling interest in another business = a change of ownership
define merger
a combination of two previously separate businesses into a new business (Sainsbury’s & Asda)
define diversification
expanding into new markets with new products - the riskiest growth strategy - also reduces risk if successful
list the key drivers for mergers and acquisitions
1) rapid technological change
2) need for economies of scale to remain cost & price competitive in world markets
3) need to be able to supply customers globally
4) low demand growth in mature economies - need to have a presence in faster growing countries
5) access to more distribution networks
6) by-pass non-tariff barriers such as import quotas
define economies of scale
operating on a large scale leads to each unit being produced having a lower average unit cost, due to being produced in large quantities. smaller businesses cannot charge the low prices as they have higher costs and are producing niche products. EOS- get more money from producing more.
examples of fast-growth businesses
- costa
- lego
- paying Spotify subscribers
define inorganic growth
external growth of the company through acquisition or merger - (takeover)
define horizontal integration
merger of two firms in the SAME industry at the SAME stage of production
define vertical integration
merger between two firms in the SAME industry but in DIFFERENT stages of production
name the two subtypes of vertical integration
- forward production integration
- backward vertical integration
define forward production integration
think of the word forward
- when firm merges with another firm further forward in the supply chain
- supplier merging with one of its buyers
define backward vertical integration
think of the word backward
- when a business purchases another business further back in the supply chain
- involves a buyer purchasing one of its suppliers
define conglomerate merger
where two funds merge that have no common interests
what do economies of scale do?
reduce the cost per unit of output - lower average unit costs
name the 4 reasons for growth
1) economies of scale
2) control over the market
3) reduced risk
4) divorce of ownership from control
define control over the market
larger funds may be able to enter more control over their markets (have a larger market share) by creating barriers to entry and reducing the competition - have more chance of being market leader
define reduced risk
purchasing funds in different industries you can reduce the risks associated with operating in the initial industry - diversification - moving (expanding) into new markets with new products
define divorce of ownership from control
managers large firms want to grow the business at the expense of shareholders. smaller firms the owner is likely to be the manager/director and therefore would not grow the business at the expense of his own profit.
name the advantages of organic growth
- lower risk
- is the norm, familiar (especially for smaller firms)
name the disadvantages of organic growth
- may not be possible to grow in external markets
- may be too slow for directors and managers to justify the large remuneration packages
name the advantages of vertical integration
- cost savings and funds can become more efficient
- reduce risk by preventing competition
give a firm more control over its market (larger market share)
name the disadvantages of vertical integration
- firms often pay too much for the acquired business - fall in share price
- key workers may leave the firm taking expertise with them
name the advantages of horizontal integration
- most managers consist of horizontal integration
- reduction in average costs due to economies of scale
- reduce competition by increasing market share
- allows the firm to grow in an industry where it already has experience
name the disadvantage of horizontal integration
buyers pay too much
key workers leave
name the advantages of conglomerate integration
- reduce risks (firms not dependant on its current market for profits)
- may find easier to expand giving it access to finance
- expertise within your organisation can be shared.
disadvantages of conglomerate integration
- lack expertise in that market to so quickly make profits by asset stripping
- pay too much for firm
- key workers leave
define the principal agent problem
- when managers have different objectives to owners e.g. may not want to maximise profits as may want a quiet life and are happy with the current profit level.
- managers salaries may be linked to revenue (performance) incentivising them to perform better (managers will out effort into what benefits them).
define demergers
when a firm splits itself into 2 entities. these new firms can be equal in size or may need to sell off small portion of firm
why demergers?
- price: total price of the 2 separate firms is often greater than a single firm alone
- focused companies: firms that focus on a limited range of markets and products deliver higher profits and growth by only focusing energies in a. few key markets, increases chance of being market leader (having higher market share), which improves profits
name the impact of demergers
- increased efficiency - (profits) from specialisation, survive longer in competitive markets
- workers- senior managers receive promotions
- consumers- they gains as firms may offer lower prices due to economies of scale
