Theme 3 - Business growth

Question 1

What are 5 main reasons why firms decide to remain small?

Answer 1

• Diseconomies of scale
• A non-profit objective
• May not be able to compete with large firms in the market
• Some businesses are niche
• Divorce of ownership - principal-agent problem

Question 2

Why do firms prefer to grow?

Answer 2

• Increase market share
• Higher dividends for shareholders
• Responsiveness to changes in internal and external environment
• Economies of scale

Question 3

What is the divorce of ownership of control?

Answer 3

This is when owners such as shareholders and the government, and the people who control the business on a day to day basis, can have a conflict of interest

Question 4

Who are the principals and who are the agents in the principal-agent problem?

Answer 4

The principals of a business are the shareholders and the agents are the directors and managers

Question 5

What is the principal-agent problem?

Answer 5

This is when the agents of the business work in the own self interest of themselves and not in the interest of the principal. This can lead to a divorce of ownership in the business. Because agents make majority of the decisions it can be have for principals to keep track.

Question 6

How is moral hazard created in the principal-agent problem?

Answer 6

The agent will take risks because the principals will bear the risks

Question 7

Distinction between a private sector organisation and public sector organisation

Answer 7

Private sector - The sector of the economy that is controlled by shareholders or individuals instead of the government
Public sector - The sector of the economy that is controlled by the government

Question 8

Distinction of a non-for-profit organisation?

Answer 8

• Some businesses do not have a profit objective but instead they have an objective to be socially responsible

Question 9

What are the 4 main ways a business can grow?

Answer 9

Organic growth, horizontal integration, vertical integration and conglomerate

Question 10

What is organic growth? Give some examples.

Answer 10

This is natural growth through market and product development.

Question 11

What are benefits and costs of organic growth?

Answer 11

Benefit = less risk and more control
Cost = Missed opportunity from acquisitions, more limited growth and it is slower. shareholders not happy

Question 12

What is Horizontal growth?

Answer 12

This is when 2 businesses in the same stage of the production process integrate

Question 13

What are the benefits and costs of horizontal growth?

Answer 13

Benefit = gain monopoly power, economies of scale, synergy, increased expertise
Costs = finance is required, diseconomies of scale, exploitation of consumers

Question 14

What are the two types of vertical integration and how do they differ?

Answer 14

Forward = when a firm acquires another firm ahead of the production process
Backward = when a firm acquires another firm behind the production process

Question 15

What are benefits and costs of vertical integration?

Answer 15

Benefits = secure suppliers, synergy, secure outlets, secure resources and sale
Costs = Finance required, diseconomies of scale from lack of communication and loss of focus in the business

Question 16

What is conglomerate integration?

Answer 16

When 2 unrelated business integrate

Question 17

What are the benefits and costs of conglomerate integration?

Answer 17

Benefits = Spreading risk by diversifying, allows for growth in different markets, cross-selling of products in different markets
Costs = Finance is required, lack of expertise and understanding of different markets and might reduce focus of the firm

Question 18

What are the 4 constraints on business growth?

Answer 18

• Size of the market
• Assessing finance
• Owners objectives
• Regulation

Question 19

How does the size of the market constrain business growth?

Answer 19

If a business is small, there is relatively small amount of growth that the business can have. So growth is limited

Question 20

How does assessing finance constrain business growth?

Answer 20

If a business doesn’t have many assets, it may not be able to provide as much collateral which may prevent its ability to obtain finance

Question 21

How do owners objectives constrain business growth?

Answer 21

If an owner has a profit satisficing objective, it may not have an intention to grow the business and so this may limit growth

Question 22

How may regulation constrain business growth?

Answer 22

Higher regulation means it may be more costly for a business and may have many barriers to grow

Question 23

What is the williamson trade-off theory for horizontal integration?

Answer 23

The trade-off between lower costs from economies of scale and then have to charge higher prices because of that power

Question 24

What is a demerger?

Answer 24

When a business splits into separate divisions

Question 25

Why do demergers occur?

Answer 25

• Conflict of cultures in the business
• Reduced diseconomies of scale
• Raising finance from selling assets

Question 26

Why might a demerger reduce diseconomies of scale?

Answer 26

• May improve communication within the business leading to an increase in productivity and an increase in output by workers as they may be more motivated

Question 27

What is the impact of a demerger on a business?

Answer 27

• Reduced diseconomies of scale
• Increased specialisation which could lead to greater communication and efficiency
• Decreased ability to compete
• Less supernormal profit to be dynamically efficient and innovate

Question 28

What is the impact of a demerger on employees?

Answer 28

• More motivation
• Scope for more jobs
• Some workers may actually lose their jobs

Question 29

What is the impact of a demerger on consumers?

Answer 29

• Lower prices if they can benefit from economies of scale and better quality if workers are more productive
• Less innovation from less SNP may reduce choice and quality and prices may increase if they have a profit maximising objective