theme 3 - 3.1 business growth Flashcards
economies of scale
occur when an increase in the scale of production results in a fall in long run average costs
why do some firms remain small?
- small market
- limited access to finance if seen as high risk to banks
- owner objective to retain control of the business
- lack of economies of scale- no potential cost savings
- individual personalised service
- need for dynamic, responsive, service-led firms
why do some firms grow?
- to benefit from economies of scale
- to increase market share
- to reduce risk
- to meet managerial objectives- e.g. increased bonuses
principal-agent problem
occurs when the aims of a firm’s owners (profit and investment returns) diverge from those of the managers (sales bonuses), which may lead to a conflict between the aims and policies of the two groups
private sector firms
owned by private individuals/groups
usually aim to make a profit
e.g.
- sole proprietors
- partnerships
- joint stock companies
- cooperative societies
public sector firms
owned by the government
can survive without making profit
e.g.
- policing
- education
- healthcare
some do aim to make a profit but do have other aims e.g. quality of service
profit organisations
aim to make/maximise profit
non-profit organisations
part of the private sector
main aim = something other than profit
e.g.
- charities
- social enterprises
cover own costs, and excess is ploughed back into the business
organic growth
increase in output and sales using internal resources
done through:
- buying new capital
- more workers
- increasing work hours
advantages of organic growth
- management has sound knowledge of the business
- can respond to changes in the market quickly
- no need for restructuring
- less risk
disadvantages of organic growth
- growth may be slower
- may decrease competitiveness
- may not take on new ideas/people
- may get too specialised in areas that are out of date
external growth
involves expansion of a business by merger or takeover (acquisitions)
BUT financial risk of debt if buy out another firm, and risk of investigation
horizontal integration
when firms merge at the same stage of the same production process
are likely to want to increase the range of products they produce or enter new markets
advantages of horizontal integration
- gain economies of scale
- increase market share
- gain a degree of market power
- reduces risk of being bought out
- increased revenue from more customers
disadvantages of horizontal integration
- diseconomies of scale
- buyout may be very expensive
- workers may lose their jobs
- some assets may be sold off, which may be wasteful
vertical integration
when firms merge at a different stage of the production process
2 types:
- backwards vertical (buy out suppliers)
- forwards vertical (buy out retailers)
backward vertical integration
increases control over raw materials, and mark-up gained as profit
BUT may not have specialist knowledge
forward vertical integration
increases responsiveness to consumer preferences
BUT may not have marketing/sales expertise
conglomerate integration/diversification
occurs when a firm buys another unrelated firm
advantages:
- gain recognition
- spreads risk across markets
disadvantages:
- differences in cultures may result in conflict and low productivity
constraints on business growth
- government regulation
- capacity constraints e.g. lack of machinery, finance, labour
- market constraints e.g. limited demand = no need to expand
- vision constraints e.g. owner’s ideas of the company like keeping it family owned
- the state of the economy
demergers
involves the separation of a large company into smaller ones
may involve dissolution of a previous merger
reasons for demergers
- to focus on the core business
- to increase profit- sell the failing parts of the business
- to raise finance
- to avoid diseconomies of scale
- to meet the demands of regulators to increase competition
impact of demergers on businesses
allows focus on core business, raising funds, and removing parts making a loss
impact of demergers on workers
may be an increase in job security, reduction in conflict between cultures and increased focus on the business
BUT some may lose their job
impact of demergers on consumers
greater competition = lower prices, more focused businesses are more able to meet consumer needs
BUT some parts of service may be limited e.g. loss of a local branch
