Theme 3: Business Growth Flashcards

Question

What are the 2 pros for organic growth?

Answer 1

1) keeps ownership and control 2) low risk

Answer 2

Firstly, using a bank loan or reinvesting profit to grow organically, a firm’s owner will keep ownership and control over the company, and take most of the profit

Answer 3

- Organic growth is low risk because the firm expands by increasing its own output. - Inorganic growth is higher risk because a firm might move into a completely new market.

Answer 4

1) lose ownership/control 2) slower growth

Answer 5

- if the owner grows organically by selling lots of shares, they will lose ownership to the shareholders. - if the owner sets up lots of franchises, they will lose control to their franchise managers.

Answer 6

compared to inorganic growth, where mergers/acquisitions speed up growth, organic growth is slow

Answer 7

1) more control of the supply chain 2) cuts out intermediary costs 3) improves access to consumers/raw materials

Answer 8

E.g. if an electricity-producer buys a power grid, it can prevent competitor firms from entering the market, by refusing to let them use the power grid. So the electricity producer will take over the market, increasing sales and profit.

Answer 9

like transport costs and markups. This will reduce a firm’s costs and increasing profits.

Answer 10

- Vertically integrating forward helps receive customer feedback directly, so a firm can improve its product, increase sales and increase profit. - Vertically integrated backward means a firm can control quality, improving its final product’s quality, increasing sales and profit.

Answer 11

1) more regulation 2) Diseconomies of scale (increase acquisition cost) 3) lack of expertise

Answer 12

If the firm prevents competition. Firms may be banned from vertically integrating or forced to pay penalties as high as 10% of annual turnover. This will increase firms’ costs, reducing profit.

Answer 13

when eBay bought PayPal for $1.5bn.

Answer 14

If a firm integrates into a stage of the production process it knows nothing about, it won’t know how to organise production, decreasing efficiency, increasing costs, decreasing profits.

Answer 15

1) economies of scale 2) more rationalization 3) reduces wasteful competition

Answer 16

It can reduce a firm’s LRAC and increasing profit.

Answer 17

When firms reorganise to avoid duplicated costs. (E.g. after two firms merge, only one accounting team will be needed, not two)

Answer 18

because the two firms are now working together.

Answer 19

1) diseconomies of scale 2) more job losses 3) brand dilution

Answer 20

As firms expand, there may be an increase in a firm’s LRAC, decreasing their profit. (Through alienation, bureaucracy and communication)

Answer 21

because duplicated departments will be fired.

Answer 22

if the firm's’ brands are very different. (E.g. if Dom Perignon merged with ASDA Sparkling Water)

Answer 23

1) risk bearing economies of scale 2) more brand awareness 3) more knowledge transfers

Answer 24

Integrating with an unrelated firm helps a firm diversify, reducing cost of failure in one sector.

Answer 25

Consumers of one firm will become aware of the other, increasing both firms’ sales. (E.g. when TATA and Starbucks merged, TATA consumers became aware of Starbucks)

Answer 26

conglomerate integration can lead to knowledge transfers between firms which increases dynamic efficiency. (E.g. Apple and Beats innovating new headphones)

Answer 27

1) diseconomies of scale 2) brand dilution 3) lack expertise

Answer 28

As firms expand, they also increase a firm’s LRAC, decreasing their profit. (Through alienation, bureaucracy and communication)

Answer 29

if one firm’s brand image negatively affects another. (E.g. Pepsi diluting Quaker Oats’ healthy porridge image.)

Answer 30

E.g. if Nando’s acquired with Ferrari, Nando’s wouldn’t know how to run Ferrari

Answer 31

1) Demergers reduce diseconomies of scale 2) Demergers enable each new separate firm to specialize 3) A firms can sell one of its Demerged divisions and its assets to raise funds 4) Demergers reduce conflicts between different cultures within a firm

Answer 32

Workers will benefit from reduced cultural conflicts between different divisions with different attitudes. This will reduce tension, increase productivity and job satisfaction, benefitting workers.

Answer 33

However, workers will suffer from lower job security. They won’t know which new division they’ll join after the demerger and if one of the division is sold to raise funds, workers may lose their jobs entirely.

Answer 34

Consumers will benefit after a demerger as each new smaller firm can specialise in their job, increasing efficiency, reducing costs and prices, but also increasing quality.

Answer 35

However, if the demerged companies are too small, it might reduce economies of scale, increasing LRAC, so firms will have to put their prices up.