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Edexcel A Economics Themes 3 and 4 > Micro 17 - Business Growth > Flashcards

Micro 17 - Business Growth Flashcards

1
Q

Define the term industry

A

An industry is the term used to describe a collection of firms operating in the same production process

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2
Q

What are not-for-profit firms?

A

Not-for-profit firms such as charities or social enterprises are organisations that do not have profit as a goal but use any profit or surplus they generate to support their aims

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3
Q

Why do firms exist?

A

Firms exist in order to organise production, they bring together various factors of production and organise the production process in order to produce output

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4
Q

What are private sector firms?

A

Private sector firms are those that are not owned by the government, they may be owned by shareholders

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5
Q

What are public sector firms?

A

Public sector firms are those which are government owned.

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6
Q

Why may a firm be publicly owned as opposed to a different type of ownership?

A

Firms may be publicly owned because they may not survive without significant state funding or because the government wishes to determine the direction the business takes. The goods may be considered too important to leave to the free market, for example they could be public goods which would not be provided by the free market due to the free rider problem

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7
Q

What are some reasons why businesses aim to grow?

A
  • Profits
  • Costs
  • Market Power
  • Reducing risk
  • Managerial motives
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8
Q

What are the two ways that businesses can grow?

A
  • Organic growth
  • Inorganic growth
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9
Q

What are the two different types of inorganic growth?

A
  • Takeovers
  • Mergers
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10
Q

What are the four different types of takeovers/mergers?

A
  • Horizontal integration
  • Vertical (forward) integration
  • Vertical (backwards) integration
  • Conglomerate integration
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11
Q

Define organic growth

A

Organic growth occurs where a business grows internally by reinvesting profits or borrowing from banks

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12
Q

Give a few examples of organic growth

A
  • Opening new stores
  • Expanding the product range
  • Advertising campaigns
  • Franchising
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13
Q

What are the main benefits to a business of using organic growth to grow?

A
  • It can be less risky than other methods of growth as it is usually slower with a greater degree of management control
  • It helps the business build on the strengths it has already established
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14
Q

What are the main drawbacks to a business of using organic growth to grow?

A
  • Organic growth can be slow - shareholders may prefer more rapid growth
  • Growth might only be achieved if the market overall is growing. It can be difficult to achieve organic growth if there is already a strong market leader
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15
Q

What are the main benefits to other parties of a business using organic growth to grow?

A
  • There is less risk and more job security for workers
  • Promotion opportunities for workers
  • More customer choice by expansion of stores
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16
Q

What are the main drawbacks to other parties of a business using organic growth to grow?

A
  • Organic growth is slow - staff whose bonuses/salaries depend on growth will want the business to grow faster
17
Q

Define horizontal integration

A

Horizontal integration occurs when two businesses at the same stage of production in the same industry join together

18
Q

What are the main benefits to a business of using horizontal integration to grow?

A
  • Horizontal integration allows firms to benefit further from economies of scale as they grow in size
  • By merging with/taking over rivals this reduces the amount of competition in the market allowing firms to have a larger market share and possibly raise prices
19
Q

What are the main drawbacks to a business of using horizontal integration to grow?

A
  • Possible culture clashes between the two firms may mean the integration is unsuccessful or more costly than anticipated
  • The firm becomes more heavily invested in one industry increasing risk in case the industry declines (all your eggs in one basket)
20
Q

What are the main benefits to other parties of a business using horizontal integration to grow?

A
  • There will likely be an increase in share price of target firm benefitting their shareholders
  • There will be quick growth for managers as there will be more people to manage
  • If gaining from economies of scale then there will be lower prices for consumers
21
Q

What are the main drawbacks to other parties of a business using horizontal integration to grow?

A
  • Remaining competitors face larger rivals
  • Customers see less competition
  • The government may have to manage/regulate the new monopoly business
  • There will be job losses due to duplication of roles
22
Q

Define vertical integration

A

Vertical integration occurs when two businesses at different production stages in the same industry join together. This can be forward - a supplier taking over a customer, or backwards- where a firm integrates with another in the stage of production further away from the customer

23
Q

What are the main benefits to a business of a business using vertical integration to grow?

A
  • The business will have greater control over the suppliers which can mean more stable access to raw materials, lower raw material costs and the possibility of increased quality
  • With greater control over the supply chain, firms might have the option of restricting supplies to rival firms
  • Greater control over where and how products are sold. This can help preserve brand image
24
Q

What are the main drawbacks to a business of a business using vertical integration to grow?

A
  • Possible culture clashes between the two firms may mean the integration is unsuccessful or more costly than anticipated
  • The business making this type of acquisition may have little expertise in that particular industry. For example a car manufacturer may have little experience running a car dealership
  • It can be an expensive way of growing - firms often pay too much for the firm they take over, there is asymmetric information between the buyer and the seller
  • Diseconomies of scale may rise - the integration may take the business beyond its minimum efficient scale
  • The firm becomes more heavily invested in one industry increasing risk in case the industry declines
25
Q

What are the main benefits to other parties of a business using vertical integration to grow?

A
  • Promotion opportunities
  • Quick growth for managers
  • Economies of scale
  • Lower prices for consumers
26
Q

What are the main drawbacks to other parties of a business using vertical integration to grow?

A
  • It is a more risky strategy so concern over job loss
  • Initial costs could lower share price
  • Concerns from rival firms if they have purchased a sales channel
27
Q

Define conglomerate integration

A

Conglomerate integration is where two businesses in different industries join together

28
Q

What are the main benefits to a business of using conglomerate integration to grow?

A
  • Risk is reduced as now more than one industry is operated in - the firm’s business activities become more diversified
  • It may increase awareness of the brand as the firm starts to operate in more industries
29
Q

What are the main drawbacks to a business of using conglomerate integration to grow?

A
  • It is less likely to lead to economies of scale. The business can lose focus as its activities are so diverse
  • The business may lack expertise in this industry
  • There may be possible culture clashes between the two firms which may mean the integration is unsuccessful or more costly than anticipated
30
Q

What are the main benefits to other parties of a business using conglomerate integration to grow?

A
  • Opportunities to work in new industries
  • Occupational mobility
  • Risk bearing economies of scale as larger overall firm
31
Q

What are the main drawbacks to other parties of a business using conglomerate integration to grow?

A
  • Job security as firm can enter new markets if fall in demand
  • Diseconomies of scale may hit share price and profits
  • Loss of focus in the business
32
Q

What are the reasons why a firm may choose to remain small?

A
  • Lack of finance for expansion
  • Low output required to reach minimum efficient scale
  • Avoiding diseconomies of scale
  • Customer relationships
  • Higher production costs may be associated with being larger
  • Size of market
  • Owner objectives
33
Q

What is the main way a business can reduce its size and scale back on their operations if they feel that they have grown too large?

A

A demerger

34
Q

What is a demerger?

A

A demerger is when a business sells off one or more of the businesses that it owns into a separate company

35
Q

What are the reasons as to why a business may demerge?

A
  • Lack of synergies
  • Protecting the value of the firm and raising funds
  • To meet requirements of competition authority regulators
  • Creating more focused firms
  • Cultural differences
36
Q

What are synergies in terms of why a business may demerge?

A
  • Synergies refer to when two firms combined lead to greater outcomes than the sum of the individual parts
  • Management may feel that there are no synergies between parts of the firm. This means that one part of the firm is having no impact on the more efficient and profitable running of the other part of the firm
37
Q
A

Edexcel A Economics Themes 3 and 4 (22 decks)

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