Business growth

Question 1

name the key motivations for business growth

Answer 1

• 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

Question 2

describe the profit motive

think about what profit is used for

Answer 2

• businesses grow to provide better returns for shareholders
  more profit - higher dividends

Question 3

describe the cost motive

Answer 3

• 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

Question 4

describe the market power motive

Answer 4

• 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

Question 5

what is the difference between monopoly and monopsony?

Answer 5

monopoly - 1 seller in the market

monopsony - 1 buyer in the market

Question 6

define the risk motive

Answer 6

• diversification across products & markets helps to reduce/spread investor risks
  moving into new markets with new products help t reduce/spread risk

Question 7

define the managerial motive

Answer 7

• managers whose objectives differ might accelerate business expansion ahead of short run profit maximisation

Question 8

define organic business growth

Answer 8

growth from “within the business” e.g. new products; expansion into new markets - (diversification)

Question 9

define external business growth

Answer 9

growth from mergers & takeovers

Question 10

define takeover

Answer 10

where one business acquires a controlling interest in another business = a change of ownership

Question 11

define merger

Answer 11

a combination of two previously separate businesses into a new business (Sainsbury’s & Asda)

Question 12

define diversification

Answer 12

expanding into new markets with new products - the riskiest growth strategy - also reduces risk if successful

Question 13

list the key drivers for mergers and acquisitions

Answer 13

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

Question 14

define economies of scale

Answer 14

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.

Question 15

examples of fast-growth businesses

Answer 15

• costa
• lego
• paying Spotify subscribers

Question 16

define inorganic growth

Answer 16

external growth of the company through acquisition or merger - (takeover)

Question 17

define horizontal integration

Answer 17

merger of two firms in the SAME industry at the SAME stage of production

Question 18

define vertical integration

Answer 18

merger between two firms in the SAME industry but in DIFFERENT stages of production

Question 19

name the two subtypes of vertical integration

Answer 19

• forward production integration

- backward vertical integration

Question 20

define forward production integration

think of the word forward

Answer 20

• when firm merges with another firm further forward in the supply chain
• supplier merging with one of its buyers

Question 21

define backward vertical integration

think of the word backward

Answer 21

• when a business purchases another business further back in the supply chain
• involves a buyer purchasing one of its suppliers

Question 22

define conglomerate merger

Answer 22

where two funds merge that have no common interests

Question 23

what do economies of scale do?

Answer 23

reduce the cost per unit of output - lower average unit costs

Question 24

name the 4 reasons for growth

Answer 24

1) economies of scale
2) control over the market
3) reduced risk
4) divorce of ownership from control

Question 25

define control over the market

Answer 25

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

Question 26

define reduced risk

Answer 26

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

Question 27

define divorce of ownership from control

Answer 27

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.

Question 28

name the advantages of organic growth

Answer 28

• lower risk

- is the norm, familiar (especially for smaller firms)

Question 29

name the disadvantages of organic growth

Answer 29

• may not be possible to grow in external markets

- may be too slow for directors and managers to justify the large remuneration packages

Question 30

name the advantages of vertical integration

Answer 30

• cost savings and funds can become more efficient
• reduce risk by preventing competition
  give a firm more control over its market (larger market share)

Question 31

name the disadvantages of vertical integration

Answer 31

• firms often pay too much for the acquired business - fall in share price
• key workers may leave the firm taking expertise with them

Question 32

name the advantages of horizontal integration

Answer 32

• 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

Question 33

name the disadvantage of horizontal integration

Answer 33

buyers pay too much

key workers leave

Question 34

name the advantages of conglomerate integration

Answer 34

• 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.

Question 35

disadvantages of conglomerate integration

Answer 35

• lack expertise in that market to so quickly make profits by asset stripping
• pay too much for firm
• key workers leave

Question 36

define the principal agent problem

Answer 36

• 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).

Question 37

define demergers

Answer 37

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

Question 38

why demergers?

Answer 38

• 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

Question 39

name the impact of demergers

Answer 39

• 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