Tutor2u Glossary Theme 3.1 Business Growth Flashcards
Agency problem
3.1.1 - Sizes and types of firms
Principal-agent problem
Possible conflict of interest that may result between the shareholders (principal) and the management (agent) of a firm
Barriers to entry
3.1.1 - Sizes and types of firms
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
Barriers to exit
3.1.1 - Sizes and types of firms
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
Divorce of ownership from control
3.1.1 - Sizes and types of firms
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
Incumbent firms
3.1.1 - Sizes and types of firms
Firms already in the market - established firms may be able to use barriers to entry
Innocent barriers to entry
3.1.1 - Sizes and types of firms
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
Innovation
3.1.1 - Sizes and types of firms
Making changes to something established. Invention by contrast is the act of coming upon or finding. Innovation is the creation of new intellectual assets
Legal barriers to entry
3.1.1 - Sizes and types of firms
Legal barriers include patent protection, legal franchises, trademarks and copyright
NGO
3.1.1 - Sizes and types of firms
Non-governmental organization (e.g. WWF, Greenpeace, Friends of the Earth, Shelter)
Not for profit organisation
3.1.1 - Sizes and types of firms
Not for profit businesses are charities, community organisations that are run on commercial lines. Also know as social enterprises
Principal agent problem
3.1.1 - Sizes and types of firms
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
Private sector
3.1.1 - Sizes and types of firms
All privately owned businesses and organisations. These businesses usually aim to return a profit to their owners
Public sector
3.1.1 - Sizes and types of firms
Public sector organisations are owned and operated by the government - in the UK this includes the NHS and state education
Shareholder return
3.1.1 - Sizes and types of firms
Total return (dividends + increases in business value) for shareholders
Strategic barriers to entry
3.1.1 - Sizes and types of firms
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
Strategic behaviour
3.1.1 - Sizes and types of firms
Decisions that take into account the market power and reactions of other firms
Structural barriers to entry
3.1.1 - Sizes and types of firms
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
Backward vertical integration
3.1.2 - Business growth
Acquring a business operating earlier in the supply chain - e.g. a retailer buys a wholesaler
Co-operatives
3.1.2 - Business growth
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
Congolmerate integration
3.1.2 - Business growth
A merger between firms in unrelated businesses e.g., between a car manufacturer and a food processing firm
Consolidation
3.1.2 - Business growth
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
Creative destruction
3.1.2 - Business growth
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
Diversification
3.1.2 - Business growth
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
Forward vertical integration
3.1.2 - Business growth
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
Horizontal collusion
3.1.2 - Business growth
An agreement between firms at the same stage of the production process to fix prices above the competitive level. Usually illegal under competition law
Horizontal integration
3.1.2 - Business growth
When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process
Hostile takeover
3.1.2 - Business growth
A takeover that is not supported by the management of the company being acquired - as opposed to a friendly takeover
Incumbent firms
3.1.2 - Business growth
Firms already in the market - established firms may be able to use barriers to entry
Internal growth
3.1.2 - Business growth
Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses
Joint-venture
3.1.2 - Business growth
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)
Merger
3.1.2 - Business growth
A combination of two previously separate organisations
Merger integration
3.1.2 - Business growth
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
Organic growth
3.1.2 - Business growth
Internal growth without resort to takeovers and mergers, often achieved through expanding the product range, selling into new countries and employing more workers
Revenue synergies
3.1.2 - Business growth
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
Social enterprises
3.1.2 - Business growth
A social enterprises is not-just-for-profit business created to address a social problem. Profits are reinvested for one or more social purposes in the community, rather than the need to satisfy investors
Stakeholder
3.1.2 - Business growth
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
Stakeholder conflict
3.1.2 - Business growth
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
Synergy
3.1.2 - Business growth
When the whole is greater than the sum of the individual parts
Takeover
3.1.2 - Business growth
Where one business acquires a controlling interest in another business. Takeovers are more common than mergers. See also horizontal and vertical integration
Vertical integration
3.1.2 - Business growth
Vertical integration involves acquiring a business in the same industry but at different stages of the supply chain
Core business
3.1.3 - Demergers
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
De-layering
3.1.3 - Demergers
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
De-merger
3.1.3 - Demergers
The hiving off of one or more business units from a group so that they can operate as independently managed concerns
Dis-synergies
3.1.3 - Demergers
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
