3.1 Business Growth

Cards (18)

  • Why firms may decide to grow:
    • Desire for higher levels of profit
    • Desire for stronger market power
    • Provides opportunities for product differentiation
    • Larger firms have the chance to have easier access to finance
    • Desire to reduce costs by EoS
  • Why firms may decide to stay small:
    • May offer a personalised service e.g., cake-making, tailoring
    • Unable to access finance for expansion
    • They provide a product that is in a niche market- smaller market size but can be very profitable
    • Rapid expansion can lead to DEoS
    • Owners' goal may not seek profit maximisation but rather satisficing
  • What is the Principal-Agent Problem?
    Why does it Happen?
    Conflicts of interest between owners and managers regarding objectives within a firm.
    Happens due to:
    Rapid expansion - principal loses control
    information gaps
  • What is a Public Sector Organisation?
    Org. that is controlled by the government
    Their ultimate goal is to maximise utility, not profit
    E.G.:
    • TFL
    • State schools
    • NHS
  • What is a Private Sector Organisation?
    Org. that is controlled by private individuals
    Their ultimate goal is maximising profit
    • Often more efficient
  • What is Organic Growth?
    Growth driven by internal expansion through reinvestment and loans.
  • What is Inorganic/External Growth?
    Growth that comes from either mergers or takeovers.
  • Types of Inorganic Growth
    Horizontal Integration: merger/takeover of firms at same stage of production process
    Conglomerate Integration: merger/takeover of firms in an entirely different industry.
    Forward Vertical Integration: merger/takeover with a firm further up supply chain (closer to consumer)
    Backward Vertical Integration: merger/takeover with a firm further backward in supply chain (closer to supplier)
  • What are the Adv. and Disadv. of Organic Growth
    + Pace of growth is manageable
    + Less risky - financed by profits and experience in industry
    + Avoids DEoS

    • Pace of growth can be slow
    • Does not guarantee benefits from Eos
    • Difficulty in finding access to finance
  • What are the Adv. and Disadv. of Vertical Integration
    + Reduces costs of production
    + Fwd. can increase brand visibility
    + Lower costs makes firm more competitive
    • DEoS can occur - duplication of resources
    • Culture clash between 2 firms
    • Inefficiencies if little expertise running in new firm
  • What are the Adv. and Disadv. of Horizontal Integration
    + Rapid rise in market share
    + Reduces competition
    + Fall in CPU due to EoS
    • DEoS can occur - duplication of resources
    • Culture Clash
  • What are the Adv. and Disadv. of Conglomerate Integration
    + Risk Diversification
    + Opens opportunities for growth - connections etc.
    + Parts of taken-over firm can be sold for a profit
    • Can result in job losses
    • Worker dissatisfaction - reduces productivity
    • DEoS can occur quickly
  • What are the Constraints on Business Growth?
    • Size of Market
    • Access to finance
    • Owner objectives - problem of satisficing
    • Regulation (CMA)
  • What is a Demerger?
    When 2 firms split back into their original positions.
  • Why may a demerger occur?
    • Clash of Corporate Culture
    • Reduce impact of DEoS on firm
    • Want to increase business focus
    • Firm may gain additional revenue without the merger
  • What are the possible impacts of Demergers on a Firm?
    • Opp. for more narrow focus on core business
    • Increased efficiency and lower costs
    • Increased annual profits for year that demerger occurred.
  • What are the possible impacts of Demergers on Employees?
    • Workers may lose their jobs
    • Reduced friction from culture clashes helps build better team dynamics
    • Smaller workforce provides more opportunities for promotions
  • What the possible impacts of Demergers on Consumers?
    • Better quality products & customer service
    • Lower prices due to new efficiencies
    • However, could lead to fall in choice and worse quality.