Business Growth- Theme 3

Question 1

Reasons why some firms tend to grow.

Answer 1

• to increase market share and become dominant firm in a particular industry
• to benefit from greater profits
• to increase sales, through larger brand recognition and more sales outlets
• to increase economies of scale

Question 2

What is the significance of the divorce of ownership from control: principal-agent problem?

Answer 2

In such cases the agent can make decisions on behalf of the business that don’t necessarily match the direction in which owners would like to take the business. This can be a problem if the principal isn’t fully aware of the actions of the business or they lack sufficient information as a exult of asymmetric information. In such instances the agent can behave in ways that conflict with the objectives of the owners. May result in agent being dismissed when this comes to light.

Question 3

Who is the principal?

Answer 3

the shareholder or owner of a business.

Question 4

Who is the agent?

Answer 4

the person in charge of the day-to-day running of the business.

Question 5

What is the private sector?

Answer 5

Private sector firms may be owned by shareholders, as with a plc which is trading on a stock market and allows anyone to buy shares in it. Or may be family owned, where shares aren’t traded on the stock market. Also include sole proprietors, which are owned and run by one person.

Question 6

What is the aim of the private sector?

Answer 6

To make a profit to satisfy the demands of their owners

Question 7

What is the public sector?

Answer 7

Owned by the government and run on the basis that it will not make a profit for shareholders but instead will reinvest any surplus fund.

Question 8

What are not for profit organisations?

Answer 8

Consist of charities, sometimes known as the third sector or civil society, which exist to provide services to local, national and international communities, and do not see profit as the primary goal.

Question 9

Explain organic growth as a method of business growth.

Answer 9

Growth by expanding the scale of their operations and gaining market share, this is achieved by investment within the firm by the firm. It’s paid for by ploughing back profits within the firm or by borrowing.

Question 10

What are the advantages of organic growth?

Answer 10

• tends to be the lowest-risk form of growth and the control of the firm remains unchanged.
• firms can build on existing strengths and continue to meet consumer expectations.
• good for workers morale and means there will be more job opportunities within the firm.

Question 11

What are the disadvantages of organic growth?

Answer 11

• tends to be slow
• building on existing knowledge of existing workers means that people may be unaware of new ideas or innovations or unwilling to take on new ideas if they involve change.

Question 12

Explain horizontal integration as a method of business growth.

Answer 12

This is a merger between 2 firms at the same stage of production.

Question 13

What are the advantages of horizontal integration?

Answer 13

• economic of scale
• reduced competition
• increased market share
• opportunities of promotion for workers
• increased prestige of firm

Question 14

What are the disadvantages of horizontal integration?

Answer 14

• unknown costs
• weakening or ‘dilution’ of brand
• loss of jobs for those duplicating work or unable to move to new headquarters.

Question 15

What is forward vertical integration?

Answer 15

Merger with a firm at the next stage of production.

Question 16

What is backward vertical integration?

Answer 16

Merger with a firm at the previous stage of production.

Question 17

What are the advantages of forward vertical merger?

Answer 17

• greater access to customers
• removal of competing suppliers
• better information about final consumer
• widening expertise and opportunities for promotion
• increased market presence and profitability might increase share price in the long run.

Question 18

What are the disadvantages of forward vertical merger?

Answer 18

• lack of expertise
• initial costs may damage profitability and therefore share price in the short run
• over exposure to end product in one market

Question 19

What are the advantages of backward vertical integration?

Answer 19

• assured supplies in timing and quality
• reduced costs of supply
• widening expertise and opportunities for promotion
• increased market presence and profitability might increase share price in the long run.

Question 20

What are the disadvantages of backwards vertical integration?

Answer 20

• lack of expertise
• initial costs may damage profitability and therefore share price in the short run
• over exposure to end product in one market

Question 21

What is a conglomerate merger?

Answer 21

A merger between firms in unrelated industries

Question 22

What are the advantages of conglomerate integration?

Answer 22

• spreads risk
• widens brand awareness
• increased job security + opportunities to become occupationally mobile.

Question 23

What are the disadvantages of conglomerate integration?

Answer 23

• dilution of brand, especially if new lines are failing companies
• firms might become unwieldy

Question 24

Describe how size of market is a constraint on business growth?

Answer 24

If firm serves a niche market that will not support expansion, there’s little scope for growth. In these cases it may be the case that the firm has a local monopoly and any further expansion will put this at risk. Some small firms may survive on basis that they’re able to provide personal service that customers prefer and would lose some of their loyal customers if they were to expand.

Question 25

Describe how owner objectives is a constraint on business growth.

Answer 25

Expansion may result in increased rewards but perhaps opportunity cost in terms of lost leisure will be too much for a sole trader therefore they remain small. This is example of satisficing, some managers may not be willing to undertake the risks necessary to expand a business, instead seeking to avoid such expansion.

Question 26

Describe how regulation is a constraint on business growth

Answer 26

Government may prevent entry or growth of a firm. Acts of parliament can allow monopolies to be formed and protected, such as provision of national lottery. Former nationalised utilities, such as water, rail and electricity, were monopolies formed and protected by acts of parliament. Patents will also give firms legal protection to ensure ideas or processes are protected from competition for the life of the patent. Other industries require licenses or specific qualifications before a firm or individual can operate.

Question 27

Describe how lack of resources and access to finance is a constraint on business growth.

Answer 27

Owner of firm may lack knowledge, expertise or funds needed for expansion. As firm expands and employs more people, it may encounter a greater level of bureaucracy, such as needing to complete National insurance returns , which will either add to its costs or be beyond the managers level of expertise.

Question 28

What are the reasons for demergers.

Answer 28

Firms may grow to large and experience diseconomies of scale, as a result of growth of output, business and managers may lose focus and control over day-to-day management of firm and therefore long-run average costs may tend to increase. To avoid this firms may demerge

Question 29

What is the impact of demergers on the business?

Answer 29

makes it smaller, might mean it has less control in market and less monopoly power this might make business less profitable, but might make it more profitable if it becomes more efficient.

Question 30

What is the impact of demergers on workers.

Answer 30

• some might be forced to move location

- might lose their job if new owners find they have workers in similar roles already.

Question 31

What is the impact of demergers on the consumer.

Answer 31

• short-term problems eg bank might change name and way it looks, or branches might close
• long-term effect is to create more competition in market so lower prices and more choice for customers.