3.1 business growth

• What are some reasons why firms tend to grow?


  To make more money, gain monopoly power, and for greater security.
• How do economies of scale benefit a growing firm?


  They help decrease costs of production.
• What is the relationship between a firm's growth and its revenue?


  Growing firms can sell more goods and therefore make more revenue.
• How does a larger market share influence a firm's pricing power?


  A larger firm can influence prices and restrict market entry for others.
• What is monopsony power and how does it relate to larger firms?


  Monopsony power allows firms to reduce costs by driving down raw material prices.
• What advantages do larger firms have in terms of security?


  They can build up assets and cash for financial difficulties.
• Why might some firms choose to remain small?

  Due to constraints on growth such as market size, access to finance, and owner objectives.
• What is the principal-agent problem in large firms?


  It is the issue arising from the separation of ownership and control.
• Who are the agents in the principal-agent problem?


  The chief executive and senior managers who control day-to-day decision making.
• How do shareholders exert power over the Board of Directors?


  By buying and selling shares, influencing share prices and strategies.
• What do owners typically want from their investment?

  To maximize returns, often seeking short-run profit maximization.
• What do directors and managers typically prioritize in their roles?


  Maximizing their own benefits as employees.
• How can the principal-agent problem lead to profit satisficing?


  Agents may prioritize their own benefits over maximizing profits for owners.
• How can firms address the principal-agent problem?


  By giving managers shares or linking bonuses to profits.
• What was a significant outcome of the Enron Scandal?


  Share prices fell from nearly $100 to less than $1 in over a year.
• What does the private sector refer to in the UK economy?


  The part of the economy owned and run by individuals or groups.
• What is the main aim of public sector organizations?


  To provide services for UK citizens, not primarily to make a profit.
• How can the private sector be divided?


  Into for-profit and not-for-profit organizations.
• What is the goal of for-profit organizations in the private sector?


  To maximize financial benefits for their shareholders.
• What do not-for-profit organizations aim to achieve?


  To maximize social welfare and help individuals and groups.
• What is organic growth in a firm?


  Growth through increasing output, such as investment or labor.
• What is an example of a firm that grew through organic growth?


  LEGO, by introducing new products like Lego Friends.
• What are the disadvantages of integration for firms?


  It is expensive, time-consuming, and high risk.
• What is a potential advantage of organic growth?


  The firm can keep control over their business.
• What is backward integration?


  When a firm merges with a supplier in the production process.
• What is forward integration?


  When a firm moves towards the eventual consumer of a good.
• What is an example of vertical integration?


  Tesco’s £3.7bn takeover of Booker in 2018.
• What is a potential benefit of backward integration?


  It allows businesses to control the quality of supplies.
• What is a disadvantage of horizontal integration?


  Firms may lack expertise in the industry they took over.
• What is horizontal integration?


  Integration of firms in the same industry at the same stage of production.
• What was AstraZeneca's acquisition of ZS Pharma intended to achieve?


  To strengthen a specific sector of their business.
• What are the advantages and disadvantages of organic growth?


  Advantages:

  • Control over business
  • Lower risk compared to integration

  
  

  Disadvantages:

  • Slow growth
  • Limited access to new markets or assets
• What are the advantages and disadvantages of vertical integration?


  Advantages:

  • Increased potential for profit
  • Reduced risks in supply chain
  • Control over quality and costs

  
  

  Disadvantages:

  • Lack of expertise in new areas
• What are the advantages and disadvantages of horizontal integration?


  Advantages:

  • Access to new markets and resources
  • Increased market share

  
  

  Disadvantages:

  • Potential lack of expertise in the acquired firm
• What is the benefit of keeping costs low for firms?


  It allows lower prices for consumers.
• How can low prices increase competitiveness?


  By attracting more consumers and boosting sales.
• What does forward integration secure for a firm?


  Retail outlets.
• What is a disadvantage of forward integration?


  Firms may lack expertise in the industry they took over.
• What was the purpose of AstraZeneca acquiring ZS Pharma in 2015?


  To access new compounds and strengthen a specific sector of their business.
• How does horizontal integration affect competition?


  It reduces competition by taking out a competitor.