3.1 Business Growth

• 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.