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 a potential outcome of a firm growing larger in terms of market share?

  It can influence prices and restrict market entry for other firms
• What is the relationship between monopoly power and monopsony power?

  Monopoly power can lead to monopsony power, allowing firms to reduce raw material costs
• Why do larger firms have more security?

  They can build up assets and cash for financial difficulties
• What are some constraints on growth that may cause firms to remain small?

  The size of the market, access to finance, owner objectives, and regulation
• What is the principal-agent problem in large firms?

  It arises from the separation of ownership and control, leading to differing aims of stakeholders
• Who owns a firm in the context of the principal-agent problem?

  Shareholders
• What role does the Board of Directors play in a firm?

  They oversee the business and represent shareholders
• How can the principal-agent problem affect a firm's profitability?

  Agents may prioritize their own benefits over maximizing profits for shareholders
• What is profit satisficing?

  It is when firms do not aim to maximize profits but rather to achieve satisfactory profits
• What was a significant event related to the principal-agent problem?

  The Enron Scandal in 2001
• What is the difference between the private sector and the public sector in the UK?

  The private sector is owned by individuals or groups, while the public sector is owned or controlled by the government
• What is the main aim of public sector organizations?

  To provide services for UK citizens
• How can private sector organizations be categorized?

  Into for-profit and not-for-profit organizations
• What is the primary goal of for-profit organizations?

  To maximize financial benefits for their shareholders
• What is the aim of not-for-profit organizations?

  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
• What are the advantages and disadvantages of organic growth compared to integration?

  Advantages:

  • Less expensive and risky than integration
  • Firms maintain control over their business

  
  

  Disadvantages:

  • May be too slow for directors wanting to maximize salaries
  • Difficult to generate new ideas
• What is vertical integration?

  Integration of firms in the same industry at different stages of production
• What is the difference between backward and forward integration?

  Backward integration moves towards suppliers, while forward integration moves towards consumers
• What is an example of vertical integration?

  Tesco’s £3.7bn takeover of Booker in 2018
• What are the advantages of vertical integration?

  Increased potential for profit and reduced risks in supply chains
• What is horizontal integration?

  Integration of firms in the same industry at the same stage of production
• What was a significant acquisition example of horizontal integration?

  AstraZeneca acquiring ZS Pharma for $2.7bn in 2015
• What advantage do firms gain by keeping costs low for consumers?

  It allows them to charge lower prices for supplies.
• How can low costs impact a firm's competitiveness?

  It can increase competitiveness and sales.
• What is forward integration in business?

  It secures retail outlets and can restrict access for competitors.
• What is a disadvantage of firms acquiring companies in different industries?

  They may have no expertise in the industry they took over.
• What is horizontal integration?

  It is when firms in the same industry at the same stage of production integrate.
• 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 and increases market share.
• What is a benefit of firms specializing after horizontal integration?

  It reduces duplicated areas of the businesses.
• What is a risk associated with horizontal integration?

  It increases risk if the particular market fails.
• What is conglomerate integration?

  It is when firms in different industries with no obvious connections integrate.
• Why was conglomerate integration popular in the 1960s and 1970s?

  It allowed firms to diversify into various industries.
• What is a key advantage of conglomerate integration?

  It reduces risk for firms by diversifying their products.
• How does conglomerate integration facilitate expansion?

  Finance can be easily obtained and managers can be transferred within the firm.
• What is a disadvantage of conglomerate integration?

  Firms may enter markets in which they have no expertise.