growth Flashcards
1
Q
why companies wish to grow
A
- Increase profit - Higher profit enables higher wages and more money for investment in expansion.
- Economies of scale - In industries with high fixed costs, increased market sales leads to lower average costs making a firm more competitive.
- Market dominance - With higher sales and market share, firms can have more influence over the long term in which they can raise price and profits.
- Risk bearing economies - A bigger firm has more resources to survive an economic downturn.
2
Q
Difficulties of Firms Growing 1
A
- Diseconomies of scale - Increasing size may lead to higher average costs due to difficulties of managing a large firm.
- Lost Perks - If a firm grows in size it may lose benefits of remaining a small firm (e.g. lower corporation tax and grants from government)
- Difficult for niche markets - Some firms may specialise in small niche markets - becoming a large firm reduces the attractiveness of the firm.
- Take over target - Listing on stock markets can make the firm vulnerable to takeovers / short termism.
3
Q
Difficulties of Firms Growing 2
A
- Profit satisficing - In bigger firms owners may struggle to retain control. Managers in charge may pursue other objectives, such as just doing enough to keep the owners happy.
- Legal barriers - A key patent may prevent other firms developing a strong brand name.
- Access to key locations - A new airline may struggle to grow because it has difficulty getting landing slots at Heathrow airport.
4
Q
How Firms Grow 1
A
• Internal expansion involves the firm increasing its sales and market share. This involves:
- Investing in new productive capacity / technology
- Marketing campaigns which increase demand for products
- Creating new product lines related to existing products.
5
Q
How Firms Grow 2
A
• External Expansion – involving a merger or takeover with another firm:
Horizontal merger, vertical merger - forward (acquiring a firm at next stage of production) or backward (previous stage), Conglomerate Merger.
