3.1 Business Growth

• Reasons why firms grow:

  • To make more money
  • To gain monopoly power
  • For greater security
  • By growing, a firm can experience economies of scale, decrease costs of production, sell more goods, make more revenue, and increase profit
  • Larger firms hold a greater share of the market, influence prices, restrict entry of other firms, and have monopsony power to reduce costs of raw materials
  • Larger firms have more security, build up assets and cash, sell a bigger range of goods in multiple markets, and are less affected by changes
• Reasons why some firms remain small:

  • Constraints on growth such as market size, access to finance, owner objectives, and regulation
  • Not all firms want to grow
• Principal agent problem:

  • Separation of ownership and control in large firms
  • Shareholders own the firm but do not participate in daily operations
  • Directors and managers control day-to-day decisions
  • Shareholders can vote directors onto and off the Board of Directors
  • Owners want to maximize returns, while directors and managers may have different objectives
  • Agents may prioritize their own benefits over profit maximization
  • Giving managers shares or linking bonuses to profits can align interests
• Types of business growth:

  • Organic growth: increasing output through investment, labor, opening new stores, expanding product range
  • Integration: amalgamation, merger, or takeover
  • Vertical integration: backward (towards suppliers) and forward (towards consumers)
  • Horizontal integration: firms in the same industry at the same stage of production integrate
  • Conglomerate integration: firms in different industries integrate
• Advantages of vertical integration:

  • Increased profit potential
  • Less risk for suppliers and buyers
  • Control over quality and reliable delivery
  • Securing retail outlets and restricting access for competitors
• Disadvantages of vertical integration:

  • Lack of expertise in the acquired industry
  • Risk of placing all resources in one area
• Advantages of horizontal integration:

  • Reducing competition and increasing market share
  • Specializing, rationalizing, and focusing on expertise
  • Growing in a familiar market for successful mergers
• Disadvantages of horizontal integration:

  • Increased risk if the market fails
  • Investing heavily in one area without fallback options
• Advantages of conglomerate integration:

  • Room for growth in new markets
  • Reduced risk through diversified products
  • Easier expansion for individual parts of the business
• Disadvantages of conglomerate integration:

  • Lack of expertise in new markets
  • Potential damage to the business
• Constraints of business growth:

  • Size of the market
  • Access to finance
  • Owner objectives
  • Regulation limiting growth opportunities
• Demergers:

  • Breaking a single business into two or more components
  • Reasons: lack of synergies, higher value of separate parts, focus on individual markets, avoiding competition authorities
  • Impacts on workers, businesses, and consumers
• Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations
• Economies of scope is when a company decides to make two simlar products and reduces average cost.
• A monopoly is when one business dominates the whole market - it has 100% concentration (in its purest form). The CMA describe a monopoly as any firm with more than 25% of the industry's sales
• Economies of scale are cost advantages that can occur when a company increases their scale of production and becomes more efficient, resulting in a ecreased cost-per-unit. It enables a business to achieve a reductio in unit costs as output rises
• Divorce of ownership from control

  Divorce of ownership from control is when the ownership of a company, represented by its shareholders, is separate from control over the company's operations and decision-making, which is typically done by the management or executives
• The issue with Divorce of ownership from control in firms is the principal -agent problem, where the principal is the shareholders and the agents are the CFO, CEO
• Public sector organisatons are owned and controlled by the state. It's purpose is to provide a service to the UK citizen . It can make a loss or a profit, but making a profit isn't geerally the main aim.
• An example of public organisations are the NHS, local councils and the police. Also, the Ministry of Defence (civil service epartments), City of Westminster (Local authorities), the BBC (Public corporations) and Ofwat (Regulators of some private sector companies)
• Private sector organisations can be profit companies or not-for-profit companies
• Not-for-profit organisations seek to maximise welfare rather than profit. They can make a profit. Examples - Wateraid, British Heart Foundation
• Organic growth is the internal growth of a business which builds on a business's own capabilities nd resources rather than growth through merger and takeover
• Owners' aim

  Maximise returns on investment for short-run profit maximisation
• Constraints on growth for firms include the size of the market, access to finance, owner objectives, and regulation
• Not all firms want to grow
• Principal agent problem


  • Separation of ownership and control in large firms
  • Shareholders own the firm but do not participate in daily operations
  • Chief executive and senior managers control day-to-day decision making
  • Shareholders represented by Board of Directors who oversee business operations
  • Differing aims between owners and directors/managers can lead to conflicts
• Enron Scandal (2001) involved executives hiding debt from the Board of Directors, leading to a significant drop in share prices
• One way to address the principal agent problem is by giving managers shares in the business or linking their bonuses to profits
• Principal agent problem occurs when one group makes decisions on behalf of another, leading to conflicts of interest
• Reasons why some firms tend to remain small and why others grow

  1. To make more money

  2. To gain monopoly power

  3. For greater security
• Monopoly power

  Firms may have monopsony power to reduce costs by driving down prices of raw materials
• Many firms are not run to profit-maximise but to profit satisfice
• Directors' and managers' aim

  Maximise their own benefits
• Benefits of firms growing

  • Experience economies of scale to decrease costs of production
  • Sell more goods and make more revenue
  • Hold a greater share of the market to influence prices and restrict entry of other firms
  • Build up assets and cash for security
  • Sell a bigger range of goods in multiple markets for stability
• Private sector is owned and run by individuals or groups of individuals
• Sectors in the UK economy

  • Private sector
  • Public sector
• Public sector

  Part of the economy owned or controlled by local or central government, providing services for citizens with profit-making not being the main aim
• Integration is expensive, time-consuming, and high risk, with evidence suggesting that the long-term share price of the company falls following integration. Firms often pay too much for takeovers, and integration is often poorly managed with many key workers tending to leave after the change
• For-profit organisations


  Run to make a profit and maximise financial benefits for shareholders