Theme 3 - Business growth Flashcards
What are 5 main reasons why firms decide to remain small?
- 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
Why do firms prefer to grow?
- Increase market share
- Higher dividends for shareholders
- Responsiveness to changes in internal and external environment
- Economies of scale
What is the divorce of ownership of control?
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
Who are the principals and who are the agents in the principal-agent problem?
The principals of a business are the shareholders and the agents are the directors and managers
What is the principal-agent problem?
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.
How is moral hazard created in the principal-agent problem?
The agent will take risks because the principals will bear the risks
Distinction between a private sector organisation and public sector organisation
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
Distinction of a non-for-profit organisation?
- Some businesses do not have a profit objective but instead they have an objective to be socially responsible
What are the 4 main ways a business can grow?
Organic growth, horizontal integration, vertical integration and conglomerate
What is organic growth? Give some examples.
This is natural growth through market and product development.
What are benefits and costs of organic growth?
Benefit = less risk and more control
Cost = Missed opportunity from acquisitions, more limited growth and it is slower. shareholders not happy
What is Horizontal growth?
This is when 2 businesses in the same stage of the production process integrate
What are the benefits and costs of horizontal growth?
Benefit = gain monopoly power, economies of scale, synergy, increased expertise
Costs = finance is required, diseconomies of scale, exploitation of consumers
What are the two types of vertical integration and how do they differ?
Forward = when a firm acquires another firm ahead of the production process
Backward = when a firm acquires another firm behind the production process
What are benefits and costs of vertical integration?
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
What is conglomerate integration?
When 2 unrelated business integrate
What are the benefits and costs of conglomerate integration?
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
What are the 4 constraints on business growth?
- Size of the market
- Assessing finance
- Owners objectives
- Regulation
How does the size of the market constrain business growth?
If a business is small, there is relatively small amount of growth that the business can have. So growth is limited
How does assessing finance constrain business growth?
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
How do owners objectives constrain business growth?
If an owner has a profit satisficing objective, it may not have an intention to grow the business and so this may limit growth
How may regulation constrain business growth?
Higher regulation means it may be more costly for a business and may have many barriers to grow
What is the williamson trade-off theory for horizontal integration?
The trade-off between lower costs from economies of scale and then have to charge higher prices because of that power
What is a demerger?
When a business splits into separate divisions
Why do demergers occur?
- Conflict of cultures in the business
- Reduced diseconomies of scale
- Raising finance from selling assets
Why might a demerger reduce diseconomies of scale?
- 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
What is the impact of a demerger on a business?
- 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
What is the impact of a demerger on employees?
- More motivation
- Scope for more jobs
- Some workers may actually lose their jobs
What is the impact of a demerger on consumers?
- 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
