business growth Flashcards
What is organic growth?
Growth of a company by internal growth - increasing factors of production eg hiring more workers, larger factories
What are the advantages of organic growth?(3)
firms owner keeps ownership and control so the owner can enjoy all the profits
No principle agent problem - can pursue social objectives
What are the disadvantages of organic growth?
Internal growth can be slow and expensive
- if grows by selling lots of shares than the owner will lose some control leading to a conflict of objectives
What is vertical integration?
firms in different stages of production combining together of the same product eg leather manufacturer buying a shoe factory
What is forward integration?
The firm takes over another firm further forward in the production process
What is backward integration?
The firm takes over another firm further back in the production process
What are the advantages of vertical integration?
More control of the production process
Can lead to monopoly power
Maybe to maintain a higher quality or more efficiency
What are the disadvantages of vertical integration?
Can create barriers to entry - harder to access suppliers or retailers
diseconomies of scale
lack of expertise
What is horizontal integration?
Combining of firms at the same stage of production process
What are the advantages of horizontal integration? (3)
Increase economies of scale
reduce competition
Lead to rationalisation cutting variable costs
What are the disadvantages of horizontal integration?
Create a monopoly
Narrow competitive market
What is conglomeration?
Merging 2 firms that have an unrelated market
What are the advantages of conglomeration?(3)
Spreading of risk - if one market is failing profit can be compensated for
Profits gained from one market can be invested into another
Leads to risk-bearing economies of scale
What are the disadvantages of conglomeration?
risk losing focus
- lack knowledge leading to inefficiency
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Explain 5 factors which may constrain the growth of a firm which might want to grow
in a contestable market always new competition
Finance - getting loans, no debt
It May be harder to grow in niche markets
Skills shortages
businesses grow so do legal requirements
what is satisficing
business is making enough profit to keep shareholders happy
why a business may not be just pursuing profit maximisation (3)
- growing market share will allow for a strong position to dominate the market and invite more workers
- A firm may also be concerned about the welfare of its stakeholders – suppliers, workers and customers. For example, giving training and long-term job security to its workers
- A firm may not be motivated by money but may seek to offer a service to the local community.
Benefits of profit maximisation 3
- can lead to higher wages for workers
- More money for research and development
- If profit is low, shareholders may be disappointed in the low level of dividends and willing to sell to a takeover bid. You could argue this incentive to be profitable is good for consumers because the firm has incentives to be efficient and cut costs, which can lead to lower prices for consumers.
The disadvantage of profit maximisation 3
- Higher prices for final consumers reduces their real incomes / purchasing power and means a lower level of consumer surplus.
- not allocatively effecient at MC=P . Welfare is not maximised
- High profits might act as an incentive for new firms to enter the market – depending on how contestable it is – which in the longer term might reduce the returns to shareholders as competition intensifies
price maker
ability of a company to set the market price of goods or services
price taker
no power to influence prices
3 causes of a buisness facing price inelastic demand
- small percent of income
- monopoly power
- short run
strategy a firm might use to make the demand inelastic
- gain a larger market share
factors that influence revenue
- Higher competition
- State of the economy
- Advertising
- reduce variable and fixed costs
Total fixed cost
Total cost of production that doesnt change with output
marginal cost
cost added by producing one additional unit
example of variable costs
- wage
- cost of raw materials
- Shipping fees
- electricity costs
example of fixed costs
- salary
- rent
- capital
3 changes in government policy influencing cost of business
- corporation tax
- business subsidies
- crowding out
the recent corporation tax rise
25% increase after 50 years
How productive efficiency can be improved
- increased training
- better capital equipment
- improved motivation
MES
firm first reaches the lowest point on the LRAC
the industry with external economies of scale
- car industry for formula one, suppliers,engineering,design firms
- science cities - technology digital and creative companies
external diseconomies of scale causes
- increase in price of raw materials
diseconomies of scale causes internal (2)
- bigger warehouses means wastage of raw materials
- difficult to coordinate between different divisions
