T3.1: Business Growth

Question 1

What is the agency problem?

Answer 1

Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm.

Question 2

What are barriers to entry?

Answer 2

Ways to prevent the profitable entry of competitors - they may relate to differences in costs between existing and new firms or the result of strategic behaviour by firms.

Question 3

What are barriers to exit?

Answer 3

Costs associated with a decision to leave a market industry, for example lost goodwill with customers, redundancy costs, and the reduced value of equipment sold at rock-bottom prices in a fire-sale of assets.

Question 4

What does ‘divorce of ownership and control’ mean?

Answer 4

This occurs when the owners of a business do not control the day-to-day decisions made in the business.

Question 5

Who are incumbent firms?

Answer 5

Firms already in the market - established firms may be able to use barriers to entry.

Question 6

What are structural entry barriers?

Answer 6

Also known as structural entry barriers - arise when established firms have lower unit costs than potential rival firms.

Question 7

What is innovation?

Answer 7

Making changes to something established. Invention, by contrast, is the act of coming upon or finding.

Question 8

What are legal barriers to entry?

Answer 8

Legal barriers include patent protection, legal franchises, trademarks, and copyright.

Question 9

What is an NGO?

Answer 9

Non-governmental organization (e.g. WWF, Greenpeace, Friends of the Earth, Shelter).

Question 10

What is the total return for shareholders?

Answer 10

Total return (dividends + increases in business value) for shareholders.

Question 11

What are strategic actions by existing businesses?

Answer 11

Strategic actions by an existing business in a market that discourages potential entrants from coming into the industry, may involve price wars, advertising, and use of patents.

Question 12

What is backward vertical integration?

Answer 12

Acquiring a business operating earlier in the supply chain - e.g. a retailer buys a wholesaler.

Question 13

What is a merger?

Answer 13

When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process.

Question 14

What is a takeover?

Answer 14

Where one business acquires a controlling interest in another business.

Question 15

What is organic growth?

Answer 15

Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses.

Question 16

What are revenue synergies?

Answer 16

The ability to sell more or raise prices after a merger e.g. marketing and selling complementary products.

Question 17

What are social enterprises?

Answer 17

A social enterprise is a not-just-for-profit business created to address a social problem. Profits are reinvested for one or more social purposes in the community.

Question 18

What is a stakeholder?

Answer 18

Any party that is committed, financially or otherwise, to a company and is therefore affected by its performance.

Question 19

What is stakeholder conflict?

Answer 19

Stakeholder conflict occurs when different stakeholders have different objectives.

Question 20

What is synergy?

Answer 20

When the whole is greater than the sum of the individual parts.

Question 21

Takeover

Answer 21

Where one business acquires a controlling interest in another business.Takeovers are more common than mergers. See also horizontal and vertical integration.

Question 22

Vertical integration

Answer 22

Vertical integration involves acquiring a business in the same industry but at different stages of the supply chain.

Question 23

Core business

Answer 23

The business that makes the most money for a company and that is
considered to be its most important and central one. A de-merger may be driven by a business wanting to focus more of their resources on their core products/services.

Question 24

De-layering

Answer 24

involves removing one or more levels of hierarchy from the
organizational structure. For example, many high-street banks no longer have a manager in each of their branches, most business start-ups have a flat management system.

Question 25

De-merger

Answer 25

The hiving off of one or more business units from a group so that they can operate as independently managed concerns.

Question 26

Dis-synergies

Answer 26

negative or adverse effects of a takeover or merger.
These are the disruptions that arise from the deal which result additional costs or lower than expected revenues.