Lesson 2 - Business Growth

Question 1

What are the two main reasons that large firms dominate?

Answer 1

• economies of scale
• barriers to entry

Question 2

What does the profit incentive result in for firms?

Answer 2

• encourages firms to grow and gain economies of scale
• reinvest profits to grow organically
• or buy other firms with their profits (usually why some markets are dominated by a small number of large firms

Question 3

What are the 2 types of businesses growth?

Answer 3

Internal and external

Question 4

What are the 3 ways that businesses grow?

Answer 4

Organic growth - firms invest into the factors of production from within to grow
Mergers - two or more firms come together under common ownership
Takeover - one company wishes to buy another

Question 5

What are the 3 types of mergers?

Answer 5

Horizontal - two firms in the same industry and factor of production
Vertical - two firms in the same industry but different factors of production
Conglomerate - two firms with no common interest

Question 6

What are the main constraints on growth (why firms struggle to grow)?

Answer 6

Regulation - laws may prevent the expansion of the firm
Owner objective - some owners are happy with their businesses and don’t want to take the risk of expanding
Size of the market - small and specialised firms don’t have opportunities to grow
Access to finance - small firms may find it difficult to get a loan

Question 7

What is a demerger?

Answer 7

When a firm splits itself into 2 or more smaller firms

Question 8

What is the impact of demergers on the firms, its workers and customers?

Answer 8

• consumers may benefit from smaller firms if they are more efficient and lower costs
• workers can lose their jobs
• smaller firms can become more specialised

Question 9

What are the advantages of Organic growth?

Answer 9

• low risk
• can be financed through profit

Question 10

What are the disadvantages of organic growth?

Answer 10

• may take years to gain the size needed to enter new markets
• owners may get frustrated by the slow pace of growth

Question 11

What are the advantages of vertical integration?

Answer 11

• forward vertical integration can give control of the market
• low risk

Question 12

What are the disadvantages of vertical integration?

Answer 12

• integrated firm may lack the expertise in the new industry
• firms often pay too much

Question 13

What are the advantages of horizontal integration?

Answer 13

• can reduce competition in the market
• may offer economies of scale
• safer to merge into an industry that you have expertise in

Question 14

What are the disadvantages of horizontal integration?

Answer 14

• integration is complex and difficult
• key staff may leave
• firms may pay too much

Question 15

What are the advantages of conglomerate integration?

Answer 15

• reduced risks (eggs are not all in one basket)
• assets can be stripped (firms sell their assets in order to make a profit)

Question 16

What are the disadvantages of conglomerate integration?

Answer 16

• the firm buying into the new industry may lack the expertise needed to succeed
• asset stripping is disadvantageous for staff in the long term

Question 17

Why might a demerger take place?

Answer 17

• diseconomies of scale
• lack of synergies within parts of the firm

Question 18

What is predatory pricing?

Answer 18

• low prices to destroy existing competition

Question 19

What is limit pricing?

Answer 19

Low prices to discourage firms from coming in