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
