lesson 2 - business growth Flashcards
what are the two reasons why large firms dominate?
economies of scale
barriers to entry
what is a barrier to entry?
they prevent competition from coming in
what is an economies of scale?
cost advantages enjoyed by large firms
what are examples of barriers to entry?
heavy advertising and promotion to establish brand loyalty
patents so you own it
limit pricing
what is a patent?
when you own it
long run
all factors of production are variable
short run
we have at least one fixed factor of production
what does the profit incentive do?
encourages firms to grow
gain economies of scale
get a competitive advantage
so they can reinvest profit and grow
what are the two main ways firms grow?
organically (internal)
mergers and takeovers (external)
what is the example of internal growth?
organic growth
what is the example of external growth?
mergers and takeovers
what is organic growth?
firms investing in capital or labour to expand production from within
what is a merger?
two or more firms come together under common ownership with an agreement of shareholders
what is a take over?
one company buys another
what are the three types of merger?
horizontal integration
vertical integration
conglomerate integration
what is horizontal integration?
two firms
same industry
same stage of production
merge
what is vertical integration?
two firms
same industry
different stages of production
merge
what is a conglomerate integration?
two firms
not same industry
no common interest
merge
what are the advantages and disadvantages of organic growth?
advantages:
- low risk, slow but sure approach
- financed through profit
- most small firms can grow without external growth (mergers or takeovers)
disadvantages:
- may take years to gain size required for new markets
- people may get frustrated at the slow pace of growth
what are the advantages and disadvantages of vertical integration growth?
advantages:
- reduces costs and risk
- forward vertical integration may give control of the market
disadvantages:
- firms often pay too much
- integrating vertically means they may lack expertise in the new industry
- it might not be a successful integration and key staff may leave
what are the advantages and disadvantages of horizontal integration growth?
advantages:
- economies of scales
- reducing competition by taking out a competitor
- safer to merge in an industry you have expertise in
disadvantages:
- firms may pay too much
- integration is complex and difficult especially is the company size is larger
- key staff may leave
what are the advantages and disadvantages of conglomerate integration growth?
advantages:
- risks reduces as all your eggs are not in one basket
- may be easier to get finance
- assets might be stripped
disadvantages:
- firm buying may lack expertise in the industry
- asset stripping may be offering short term profits but its likely to be disadvantageous for staff
what is forward growth?
a company buys control over the later stage of the supply chain eg selling the car
what is backwards growth?
a company buys the earlier stage of the supply chain eg making the car parts
what is an asset?
something valuable that a person or business owns and can use to generate income or benefits
what are the four constraints on growth?
size of the market
access to finance
owner objectives
regulation
why is the size of the market a constraint on growth?
some are small
specialised
offer no opportunity to become a big company
why is access to finance a constraint on growth?
firms may growth by taking out loans but this might be difficult for small firms to get
why is owner objectives a constraint on growth?
some are happy with local or small businesses and don’t want any extra stress or risk
why is regulation a constraint on growth?
laws may prevent expansion
what is a demerger?
firm splits itself up
what is a limit price?
low prices to discourage firms from coming in
what is the economies of scale that large firms have over smaller ones?
financial economies
what are three types of economies of scales large firms may enjoy?
purchasing (bulk buying)
technical (specialised machines)
marketing economies (advertising)
what does low and high barriers to entry mean for the structure of an industry?
high barriers - few firms dominate, difficult to enter so monopolies or oligopolies
low barriers - more competitive
what is profit?
reward for entrepreneurs
when do we breakeven?
TC = TR
