Growth of Firms Flashcards
What are the benefits a firm gets when it expands? (HINT: There are 3)
1-In the long run, if they keep expanding they should make more profit because they have more customers. But in the short term their profits might go down because it is expensive to expand.
2-As they get bigger they should be able to benefit form more economies of scale that should help them become more efficient, increasing profit
3-If they keep expanding, they will keep getting more customers, that will give them a larger market share.
Why does a firm want a large market share?
The % of customers they have in the market, i.g. market share.
The higher the market share, the more control the business has in the market. This decreases their customers choices, and also gives them more power, making it easier to make profit.
What are the methods of growth?
HINT: There are 2
1-Internal or organic growth - This is where businesses grow by constantly reinvesting money back into the business. from profit or borrowing etc. e.g. Opening new stores.
2-External or inorganic growth - This is where businesses grow by taking over other companies.
What are the advantages and disadvantages of organic growth?
Advantages:
-They have more control over when things happen
-Less risky because a business can limit their expansion to what they can afford
-Can grow more slowly, therefore its easier to keep
control, thus preventing diseconomies of scale.
Disadvantages:
-Harder to benefit from economies of scale
What are the advantages and disadvantages of inorganic growth?
Advantages:
- New customers
- Gets rid of the competition
- Increased market share
- Benefit from economies of scale
- Taking over an established business with a strong brand, reducing risk
- Reduction in costs where there are now 2 or things, i.e. only 1 human resource department is needed - Rationalisation
Disadvantages:
- If they grow too quickly they could suffer from diseconomies of scale
- Usually to take over another company it is very expensive, particularly if the business is well established. There is a huge opportunity cost.
Define what is meant by Merger
Where two companies come together and agree to form a new business
Define what is meant by Takeover
Where one company buys another company and that company becomes part of that business, E.g. Walmart bought Asda.
What are the stages of production?
There are 3 main levels of production:
1- Suppliers - They provide the raw materials and the parts that the business needs
2-Manufacturers - The business that makes the product
3-Retailers - The business that sells the product
There are 3 main types of mergers and takeovers. What are they?
Horizontal merger/takeover - Where two businesses at the same level of production in the same industry join together
Vertical merger/takeover - Where two businesses at different levels of production in the same industry join together
Conglomerate merger/takeover - This is where businesses join up with other businesses from completely different industries.
