Tutor2u Glossary Theme 3.1 Business Growth

Question 1

Agency problem

3.1.1 - Sizes and types of firms

Principal-agent problem

Answer 1

Possible conflict of interest that may result between the shareholders (principal) and the management (agent) of a firm

Question 2

Barriers to entry

3.1.1 - Sizes and types of firms

Answer 2

Ways to prevent the profitable entry of competitors - they may relate to differences in costs between existing and new firms. Or the result of strategic behaviour by firms

Question 3

Barriers to exit

3.1.1 - Sizes and types of firms

Answer 3

The costs associated with a decision to leave a market/industry, for example, lost goodwill with customers, redundancy costs and the reduced value of equipment at rock-bottom prices in a fire-sale of assets

Question 4

Divorce of ownership from control

3.1.1 - Sizes and types of firms

Answer 4

This occurs when the owners of a business do not control the day-to-day decisions made in the business. The owners of a company normally elect a board of directors to control the business’s resources for them

Question 5

Incumbent firms

3.1.1 - Sizes and types of firms

Answer 5

Firms already in the market - established firms may be able to use barriers to entry

Question 6

Innocent barriers to entry

3.1.1 - Sizes and types of firms

Answer 6

Also know as structural entry barriers - arise when established firms have lower unit costs than potential rival firms. Might come about from first mover advantage

Question 7

Innovation

3.1.1 - Sizes and types of firms

Answer 7

Making changes to something established. Invention by contrast is the act of coming upon or finding. Innovation is the creation of new intellectual assets

Question 8

Legal barriers to entry

3.1.1 - Sizes and types of firms

Answer 8

Legal barriers include patent protection, legal franchises, trademarks and copyright

Question 9

NGO

3.1.1 - Sizes and types of firms

Answer 9

Non-governmental organization (e.g. WWF, Greenpeace, Friends of the Earth, Shelter)

Question 10

Not for profit organisation

3.1.1 - Sizes and types of firms

Answer 10

Not for profit businesses are charities, community organisations that are run on commercial lines. Also know as social enterprises

Question 11

Principal agent problem

3.1.1 - Sizes and types of firms

Answer 11

This is an asymmetric information problem. Owners often cannot observe directly the day-to-day decisions of management. The performance of the agent is costly and and difficult to monitor. Managers may have different objectives than owners

Question 12

Private sector

3.1.1 - Sizes and types of firms

Answer 12

All privately owned businesses and organisations. These businesses usually aim to return a profit to their owners

Question 13

Public sector

3.1.1 - Sizes and types of firms

Answer 13

Public sector organisations are owned and operated by the government - in the UK this includes the NHS and state education

Question 14

Shareholder return

3.1.1 - Sizes and types of firms

Answer 14

Total return (dividends + increases in business value) for shareholders

Question 15

Strategic barriers to entry

3.1.1 - Sizes and types of firms

Answer 15

Strategic actions by existing business in a market that discourages potential entrants from coming into the industry, may involve price wars, advertising and use of patents

Question 16

Strategic behaviour

3.1.1 - Sizes and types of firms

Answer 16

Decisions that take into account the market power and reactions of other firms

Question 17

Structural barriers to entry

3.1.1 - Sizes and types of firms

Answer 17

Cost advantages of existing, established firms in a market - they might have benefitted from economies of scale, vertical integration and built up high levels of customer loyalty. This makes it more expensive for a new firm to enter successfully

Question 18

Backward vertical integration

3.1.2 - Business growth

Answer 18

Acquring a business operating earlier in the supply chain - e.g. a retailer buys a wholesaler

Question 19

Co-operatives

3.1.2 - Business growth

Answer 19

Co-ops are owned and run by their members, who can be customers, employees or groups of businesses. The supermarkets-to-funerals Co-op groups is the biggest collowed by John Lewis partnership, the retailer

Question 20

Congolmerate integration

3.1.2 - Business growth

Answer 20

A merger between firms in unrelated businesses e.g., between a car manufacturer and a food processing firm

Question 21

Consolidation

3.1.2 - Business growth

Answer 21

Consolidation refers to the reduction in the number of competitors in a market and an increase in the total market share held by remaining firms

Question 22

Creative destruction

3.1.2 - Business growth

Answer 22

First introduced by the Austrian School economist Joseph Schumpeter. It refers to the dynamic effects of innovation in markets - for example where new products or business models lead to a reallocation of resources. Some jobs are lost but others are created. Established businesses come under threat

Question 23

Diversification

3.1.2 - Business growth

Answer 23

Increasing the range of products or markets served by a business. The extent of diversification depends on the extent to which those products or markets are different from the existing products and markets served by the business

Question 24

Forward vertical integration

3.1.2 - Business growth

Answer 24

Acquring a business further up the supply chain - e.g. a vehicle manufacturer buys a car prts distributor; a brewing firm acquries a number of pubs

Question 25

Horizontal collusion

3.1.2 - Business growth

Answer 25

An agreement between firms at the same stage of the production process to fix prices above the competitive level. Usually illegal under competition law

Question 26

Horizontal integration

3.1.2 - Business growth

Answer 26

When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process

Question 27

Hostile takeover

3.1.2 - Business growth

Answer 27

A takeover that is not supported by the management of the company being acquired - as opposed to a friendly takeover

Question 28

Incumbent firms

3.1.2 - Business growth

Answer 28

Firms already in the market - established firms may be able to use barriers to entry

Question 29

Internal growth

3.1.2 - Business growth

Answer 29

Internal growth occurs when a business gets larger by increasing the scaloe of its own operations rather than relying on integration with other businesses

Question 30

Joint-venture

3.1.2 - Business growth

Answer 30

Agreement between two or more companies to cooperate on a particular project of business that serves their mutual interest. E.g. Google and NASA (Google Earth)

Question 31

Merger

3.1.2 - Business growth

Answer 31

A combination of two previously separate organisations

Question 32

Merger integration

3.1.2 - Business growth

Answer 32

The process of bringing two firms together once they have come under common ownership. Often regarded as the most difficuly part of any takeover or merger. The integration process needs to cover “hard” areas such as IT systems and marketing strategy as well as “soft” issues such as different business cultures

Question 33

Organic growth

3.1.2 - Business growth

Answer 33

Internal growth without resort to takeovers and mergers, often achieved through expanding the product range, selling into new countries and employing more workers

Question 34

Revenue synergies

3.1.2 - Business growth

Answer 34

The ability to sell more or raise prices after a merger e.g. marketing and selling complementary products; cross-selling into new countries and employing more workers

Question 35

Social enterprises

3.1.2 - Business growth

Answer 35

A social enterprises is not-just-for-profit business created to address a social problem. Profits are reinvested for one or more social puirposes in the community, rather than the need to satisfy investors

Question 36

Stakeholder

3.1.2 - Business growth

Answer 36

Any party that is committed, financially or otherwise, to a company and is therefore affected by its performance. This would normally include shareholders, employees, management, customers and suppliers. Their interests do not always coincide

Question 37

Stakeholder conflict

3.1.2 - Business growth

Answer 37

Stakeholder conflict occurs when different stakeholders have different objectives. Firms have to choose between maximising one objective and satisfactorily meeting several stakeholder objectives, so called satisficing

Question 38

Synergy

3.1.2 - Business growth

Answer 38

When the whole is greater than the sum of the individual parts

Question 39

Takeover

3.1.2 - Business growth

Answer 39

Where one business acquires a controlling interest in another business. Takeovers are more common than mergers. See also horizontal and vertical integration

Question 40

Vertical integration

3.1.2 - Business growth

Answer 40

Vertical integration involves acquiring a business in the same industry but at different stages of the supply chain

Question 41

Core business

3.1.3 - Demergers

Answer 41

The business that makes the most money for a company and that is considered to be its most important and central one. A de-merger may be driven by a business wanting to focus more of their resources on their core products/services

Question 42

De-layering

3.1.3 - Demergers

Answer 42

De-layering involves removing one or more levels of heirarchy from the organisational structure. For example, many high-street banks no longer have a manager in each or their branches, most business start-ups have a flat management system

Question 43

De-merger

3.1.3 - Demergers

Answer 43

The hiving off of one or more business units from a group so that they can operate as independently managed concerns

Question 44

Dis-synergies

3.1.3 - Demergers

Answer 44

Dis-synergies are negative or adverse effects of a takeover or merger. These are the disruptions that arise from the deal which result additional costs or lower than expected revenues