Theme 3: Business Growth Flashcards
Give 5 reasons some firms grow?
- Make more sales and profits
- increase market power
- Diversify and risk bearing economies of scale.
- Economies of scale
- Owners objectives
Give 5 reasons why some firms stay small?
- Don’t have finance to grow
- Regulations
- Niche market
- Diseconomies of scale
- Profit satisfice
What are the 6 types of economies of scale?
- Risk bearing
- Managerial
- Financial
- Purchasing
- Technical
- Marketing
What are the 3 types of diseconomies of scale?
- Alienation
- Bureaucracy
- Communication
What is the Principal-agent problem?
Agent pursues different objectives to the principal
What is the divorce of ownership and control?
The shareholders (principal) might have the objective of higher profits so want to profit maximise.
Whereas the CEO might want to maximise revenues or sales and pursue other objectives.
Due to the asymmetric information there is the divorce of ownership and control.
What is organic growth?
When a firm grows by investing in itself to increase output.
What is inorganic growth?
When firms grow through merging or acquiring.
What are the 4 types of inorganic growth?
- Backward vertical
- Forward vertical
- Horizontal
- Conglomerate
Pros of organic growth?
- Keep ownership and control
- Low risk
Pros of vertical growth?
- Control supply chain
- Reduce intermediary costs
- Better access to consumers
Cons of vertical integration
- Regulation
- Diseconomies of scale
- May lack expertise in that market
Pros of conglomerate integration
- Risk bearing economies of scale
- Increased brand awareness
- Knowledge transfer
Cons of conglomerate integration
- Diseconomies of scale
- Brand dilution
- Lack expertise
Pros of horizontal intergration?
- internal economies of scale
- rationalisation
- Reduce wasteful competition
Cons of horizontal integration
- Internal diseconomies of scale
- Job losses
- Brand dilution
Cons of organic growth?
- Growth may be dependant on growth of overall market and is therefore out of the control of the firm.
- Slower growth- shareholders may demand more rapid growth.
4 reasons for demergers
- Reduce diseconomies of scale
- Specialisation
- Asset sales
- Culture differences
What is a pro and con of demergers for workers
Pro- Reduce culture conflict
Con- Reduce job security
What is a pro and con of demergers for consumers
Pro- More specialisation
Con- Less economies of scale so possibly higher prices.
