Theme 3:3.1-Business Growth Flashcards
what are the 6 main ways to measure the size of a firm?
1.number of employees
2.turnover
3.market share
4.management structure
5.profits
6.balance sheet
6 reasons why firms grow?
-profit
-benefit from economies of scale
-increased market share
-diversification-firms can diversify products and spread risk across markets
-managerial motives
reasons why firms stay small?
-maintain good customer service
-to avoid diseconomies of scale
-to specialise in niche markets where large firms do not wish to operate
what is the principal-agent problem?
larger the firm the more likely it is that owners will not be involved in day-day operations
who is the principal and who is the agent?
principal-shareholders
agent-chief executive(CEO)
what is the main aim of the agent?
to maximise utility for the principal
explain the problem with the principal-agent problem in regards to rewards.
executives and managers can award themselves large pay packages/bonuses that shareholders think is unfair
explain the problem with the principal-agent problem in regards to market share.
managers could grow the company in terms of market share or size but at the expense of profit.Shareholders may not be happy with this approach.
explain the problem with the principal-agent problem in regards to a takeover.
the CEO may make decisions based on whats best for them rather than whats best for shareholders
what are public sector organisations.
organisations owned and run by the state and government
what are private sector organisations.
organisations owned and run by individuals and are usually driven by a profit motive.
what are the two types of ‘unlimited’ organisations?
-sole trader(small)-single owner makes decisions
-partnership(small)-around 2-20 people who share profits and decisions
what are the two types of ‘limited’ organisations?
-private limited companies-shares are privately traded e.g. Mars & Arcadia
-public limited companies-shares are traded openly on the stock market e.g. M&S
what are the 4 ways a business can grow?
organic growth
horizontal integration
vertical integration
conglomerate intergation
define organic growth.
businesses growing gradually using their own resources usually through reinvestment of profits
define horizontal intergration.
when two firms from the same industry at the same stage of production merge together
define forwards vertical intergration.
when the firm integrates with another firm closer to the consumer. This involves taking over a distributor. For example, a coffee producer might buy the café where the coffee is sold.
define backwards vertical intergration.
occurs when a firm integrates with a firm closer to the
producer. This involves gaining control of suppliers. For example, a coffee producer might buy a coffee farm.
define conglomerate intergration.
when 2 firms from different industries merge together e.g. virgin
pros and cons of organic growth.
PROS:
less risky than inorganic growth
cheap
more control
less likely diseconomies of scale
CONS:
slow growth
cant get expertise like inorganic growth
can get left behind if rivals are all growing inorganically
pros and cons of horizontal intergration.
PROS:
larger growth
less competition
benefit from economies of scale
CONS:
two firms may have different objectives
little chance of success as 96% of all mergers fail
pros and cons of vertical intergration.
PROS:
control over quality and quantity of goods
cost saving
CONS:
communication issues can arise
higher risk than organic
firms forced to pay large price
pros and cons of conglomerate intergration.
PROS:
spreads risk across markets
CONS:
other company may lack expertise
what is a merger?
two businesses join together for mutual benefit
what is a takeover?
one business acquires another including all its assets can be hostile or voluntary
what is a demerger?
when a large firm is separated into multiple smaller firms
what are the reasons why firms demerge?
lack of synergies
growth/share price
diseconomies of scale
focussed companies
resources
finance
explain lack of synergies as a reason why firms demerge..
a synergy is when creating a whole company is worth more than each company on its own. Without this firms are likely to demerge because they will be worth more
explain growth/share price as a reason why firms demerge..
each part of firm could be growing at different rates. The faster growing part might be separated. Growing side can hold stringer share price if demerged.
explain focussed companies as a reason why firms demerge.
the firm might be able to0 grown faster if it focuses on a few markets.
explain resources as a reason why firms demerge.
if firm cant afford to invest due to lack of resources, they might sell a part of it.
explain finance as a reason why firms demerge.
selling of parts can raise finance which may be better invested in a more profitable part of the firm.
what are the impacts of a demerger on workers?
PROS:
may lead to promotion as managers may need to separate
CONS:
demergers aim to become efficient so could lead to job losses
what are the impacts of a demerger on firms?
PROS:
focussing on a smaller business may create more innovation and efficiency
CONS:
could lose out on economies of scale ]
what are the impacts of a demerger on consumers?
PROS:
consumers get better products due to more innovation
CONS:
prices may be higher due to loss of economies of scale
define vertical intergration.
when a firm merges with or takes over another firm in the
same industry, but a different stage of production
example of a demerger and info
ebay and paypal 2015
example of merger
takeaway.com(dutch) and just eat
(British)£6.2 billion in 2020
