The growth of firms

Question 1

Why do businesses want to grow?

Answer 1

• Increased Profits so they can boost welfare of the shareholders and improve their ability to reinvest.
• Non profit objects, for example charities. Increase size to gain larger influence, and increase revenue in order to gain funds to spend on ethical social causes.

Question 2

Firms want to increase profits - Higher revenue will increase profits

Answer 2

• A large Business will be producing more output and therefore generating more revenue.
• A larger Business might gain price setting ability and therefore may be able to sell output at a higher price per unit. Firms make more revenue per unit and AR will be more price inelastic.

Question 3

Firms want to increase profits - Lower costs will increase profits

Answer 3

A larger firms might benefit from increased internal ecponomies of scale E.G technological, managerial, financial and purchasing. This reduces costs per unit.

Question 4

Firms want to increase profits - Product

Answer 4

Larger firms can diversify into new product areas (By investing their profits into new product areas and investing in new development, this also means they are less susceptible to individuals demand and supply chocks.

Question 5

Why might businesses want/need to remain small

Answer 5

• Diseconomies of scale, increased LRATC as a result of growth, communication issues and worker productivity could fall. This could mean costs rise and profits fall as a result of growth.
• Increased oversight and government regulation if firms grow, and in the extreme case it could result in break up or nationalisation.
• Specialised industry ot a niche product has little scope for growth, however they may be able to diversify.
• Growth requires funding, investing returned profits, borrowing (not always possible at high interest rates), issue stock (lose potential value in ownership)
• Owners run smaller family oreintated buisness and perhaps do not possess the skills and knowledge to grow.

Question 6

Horizontal inergration

Answer 6

• Same industry and the same point in the supply chain. Direct competitors.
• Less competitive pressures, more control over prices and greater price setting ability. They gain consumers and greater market share. Profits rise.
• Cost advantages. Can share suppliers at lower costs, share distribution and storagre facilities, Economies of scale.

Question 7

Conglomerate intergration

Answer 7

• This is merging with a firm in a entirley different industry and therefore diversfiying into different products and revenue streams.

EXAMPLE Unilever

Question 8

Types of Business growth

Answer 8

• Organic growth
• External (inorganic) growth

Question 9

Types of Business growth - Organic growth

Answer 9

• Investing into new productive proccesses to scale up production. This is more common than external growth and generally more expensive.

Question 10

Types of business growth - external growth

Answer 10

• Growing through mergers and acquisitions

Question 11

Verticle integration

Answer 11

• Merging or Aquiring a business that is in the same industry but at a different point in the supply chain.

Question 12

Forward Verticle integration and the benefits

Answer 12

• This is closer to the end of the consumer.
• This can gain access to the ‘mark-up’ that is made by that firm (PROFIT).
• Knowledge of the consumers need and and wants.

Question 13

Backwards Verticle inegration and the benefits

Answer 13

• This is further from the end of the consumer.
• The main benefit here is that it gives the firm more control over the supply chain and therefore lower costs.

Question 14

Constraints on a Business trying to grow

Answer 14

• Limited market size, small or niche product.
• Limited access to finance
• Regulation that prevents or limits growth.
• Owner objectives

Question 15

What is a DEMERGER

Answer 15

This is when a business sells off one or more of the business that it owns into a seperate company.

Question 16

Reasons for Demergers

Answer 16

• Cultural differences that emerge between the two entities.
• Creating a firm with a narrower focus (perhaps on the quality rather than the range of products)
• Reducing the risk of diseconomies of scale.
• Raising funds for investment elsewhere such as selling off part of the business generates money.
• Might be necessary to meet the demands of competition regulators.

Question 17

Impacts of demergers on the business

Answer 17

• Firms can dipose of underperforming or loss making parts of the firm and allows the larger firm and the new demerged firm to focus on core activities. Allows them to adapt and focus on individual markets.
• Eliminate diseconomies of scale.
• Make short term profit by selling off part of the firm, this could also be used a source of finance to grow and reinvest.

Question 18

Impacts of demergers on the workers

Answer 18

• Workers might become confised and a experience a change of roles.
• Job cuts

Question 19

Impacts of demergers on consumers

Answer 19

The removal of diseconomies of scale could lead to lower prices for consumers, there could be a net welfare gain and a high level of allocative efficiency. If two firms in the same industry and the same stage of production demerge than choice could increase