Micro A2.1 - Business Growth

Question 1

What are economies of scale?

Answer 1

cost advantages reaped by companies when production becomes efficient

Question 2

What is the Principal Agent Problem

Answer 2

Where one group, the agent makes decisions on behalf of another group, the principal. Ideally the agents should maximise benefits for the principal but in practice agents have temptation to maximise their own profits

Question 3

Why would firms want to grow?

Answer 3

1. Will experience E O S
2. Larger share of the market so they can influence prices
3. Build up assets which can be used in time of difficulties

Question 4

What is Organic Growth

Answer 4

Where firms grow by increasing their output. eg. increased investment, more labour, new stores or increasing their range of products

Question 5

What are the Advantages and Disadvantages of Organic Growth

Answer 5

Advantages

1. Integration is expensive, time consuming and high risk as firms usually overpay for takeovers and many key workers leave
2. Frim can keep control over their business

Disadvantages

1. Another firm will occupy a market or have an asset which a firm cant gain through organic growth (eg. a European company which wants to expand into Asia)
2. Organic growth may be too slow
3. Difficult for firms to get new ideas to help it grow

Question 6

What is Vertical Integration? + what is forward and backwards integration

Answer 6

When firms in the same industry but at different stages of the production process integrate.

Forward = moving closer to consumer
Backward = closer to supplier

Question 7

What are the Adv and Dis of forwards + backwards integration?

Answer 7

Adv

1. increased potential for profit
2. less risks for the firms
3. with back integration firm can control quality of supply + make sure delivery is more reliable
4. forward integration secures retail outlets where they can stop competitors from moving in

Dis
1. firm may have no expertise into what they have moved into

Question 8

What is horizontal integration

Answer 8

When 2 or more firms in the same industry integrate at the same point in the production process (Curry’s and PC World)

Question 9

Adv and Dis of horizontal integration

Answer 9

Adv

1. helps reduce competition as another competitor is taken out
2. firms can specialise
3. can grow in a market where it already is specialised so higher chance of success

Dis
1. increased risk for frim because if that market fails they have nothing to fall back on

Question 10

What is conglomerate integration

Answer 10

when two firms which are in completely different industries integrate

Question 11

Adv and Dis of conglomerate integration

Answer 11

Adv

1. useful for firms where there is no more room for growth in the market
2. range of products reduces risk for firm, so if one market fails they have another to fall back on
3. easier for the individual parts to expand as money can be easily obtained from other parts of the firm

Dis
1. going into markets which they usually have no expertise in

Question 12

What are the constraints to Business Growth?

Answer 12

1. Size of the Market - even large markets may not have room for new firms with the same products, especially true for niche and luxury markets
2. Access to finance - firms grow through retained profits or loans. if shareholders taking money = low profits. if firms is seen as risky or too small then banks wont loan so the firms cant grow
3. Owner Objectives - owners may be happy with current profits and do not wish to grow anymore
4. Regulation - regulation from gov’t stopping them grow

Question 13

Why do firms Demerge?

Answer 13

1. Lack of Synergies - when different parts of the company have no effect on each other and fail to make each other efficient. Managers have to split their time which could lead to diseconomies of scale
2. Value of Company Prices - one part may be performing very well and have potential for growth, another may be inefficient and pull down the good side and the share price
3. Want to be more focused - by splitting managers can focus their time on individual markets and start to become more efficient and successful = higher profits

Question 14

What are the Impacts of Demergers?

Answer 14

Workers - good if need for more managers arises so workers are promoted
bad if in becoming more efficient the firms has to cut ppl

Business - good if it leads to more efficiency and success through more innovation = more profits
bad because now they are a smaller firm which could lead to a loss of EOS

Consumers - good if firm becomes more specialised = lower prices
bad if firm experiences diseconomies of scale so has to raise prices