Businesses and Growth Flashcards
Reasons why some firm tend to remain small
- Limited access to capital
- Regulations limit growth
- Niche market
- Avoid diseconomies of scale
- Business objectives
Reasons to why some firm grow
- Increases sales and profit (for larger shareholder returns)
- Increase market share
- Reduce hostile takeovers
- Enjoy economies of scale (risk bearing and purchasing)
Principal agent problem
When interest of company owners do not aligned with its managers
3 ways of overcoming principal agents problem
- Align incentives - tie to company’s performance
- Increased transparency - mitigate asymmetry information between owners and agents
- Appointment independent directors
Why is a shareholder considered principal/
why is a manager considered agent?
principals are owners of the company
agents run and make daily decisions on the company
What’s private sector
Firms owned and operated by private individuals and companies.
What’s public sector
Firms owned or controlled by local or central government.
define for profit organisations
Businesses whose main aim is to maximise profit
define non-profit organisations
Firms whose main aim is to maximise social welfare, rather than profit.
Definition of organic growth
When a firm increases internal output and sales by using its own resources.
Organic growth advantage and disadvantage
AD:
1. Low risk to firm
2. Keep ownership and control (stratton oakmont)
DA:
1. Slower growth compared to other strategies
- lose ownership and control (by selling shares or setting too many franchises) Uber, 10% of company
Vertical merger definition
When firms within the same industry joined together, but in different stages of production
Vertical forward/backward integration definition
Merger or takeover of a business closer to the final consumers/supply chain
Vertical integration advantages and disadvantages
AD:
1.More profit due to no middlemen
2.Taking market intelligence away from competitors
3.Ensure reliable and control of supply chain
DA:
1. Cost due to acquisition
2. Diseconomies of scale as less familiar area of operations (alienation and culture)
Horizontal merger definition
Merged with another firm in the same industry, same stage of production/supply chain
Horizontal merger advantage and disadvantages
AD:
1. Rapid market share expansion
2. Potential for economies of scale
DA:
1. Diseconomies of scale due to cultural differences
2. Regulatory hurdles and antitrust concerns (CMA)
Conglomerate merger definition
Merger between firms that are unrelated in business
Conglomerate merger advantage and disadvantage
AD:
1. Spread risk - risk bearing economies
2. Synergy effects, enhancing brand awareness (Mrbeast youtube and Prime)
DA:
1. Unfamiliar market
2. Diseconomies of scale
Define de-merger
When a firm decides to split into separate firm
Reasons to de-merge
- Reduces diseconomies of scale
- Further specialisation of smaller firms (PepsiCo, Yum!)
- Source of capital funding
Advantage and disadvantage of demerger to workers
1 reason each
AD:
1. reduces cultural conflict between different divisions
DA:
1. reduction in job security as divisions within a firm may be laid off after demerging
Demerger for business ad and da
AD:
1. reduces diseconomies of scale
- allows further specialisation
- More dynamic efficiency from profit from demerging
DA:
1. Smaller size of business lead to loss of economies of scale, reducing efficiency
Demerger for consumers, ad and da
AD:
1. lower cost reduced diseconomies of scale
- Higher quality and wider range from further specialisation
DA:
1. Less efficient through reduced economies of scale
