Theme 2 - AS

• Organic growth

  Extending own operations.

  Advantage:

  • less risky , the business has control and builds on strengths within the business

  Disadvantage:

  • slow, it depends on market growth, success not guaranteed
• Inorganic growth

  Expansion via mergers and takeovers

  Advantage:

  • quick, economies of scale, new markets

  Disadvantage:

  • less control over it, less flexible, more costly than organic usually
• Horizontal integration

  2 firms at the same stage of production integrate
• Vertical integration

  2 firms at different stages of production integrate.

  (Backward, forward)
• Conglomerate integration

  2 unrelated firms integrate
• How do small firms compete?

  • Product differentiation or have a USP
  • Have flexibility with payments, and have good customer service
  • Target niche markets
  • Better relationships with consumers, which leads to increased loyalty
  • Good quality products
• Price elasticity of demand (PED)

  The responsiveness of quantity demand when there is a change in price.

  Price elastic (demand changes more than a change in price) >1

  Price inelastic (demand doesn't change more than a change in price) <1
• Factors that influence PED

  • Substitute products
  • % of income spent
  • Luxury vs necessity
  • Developed an addiction
• Income elasticity of demand (YED)

  The responsiveness of quantity demanded to change in income.

  Normal good (have positive YED)

  As income rises so does consumer demand at all price levels

  Inferior good( have negative YED) and have an inverse relationship.

  As incomes rise demand falls.

  
• Lean production

  It will reduce average costs. Money can be spent elsewhere to improve productivity/efficiency.

  Higher profits

  Lower sales prices to increase market share/sales revenue.

  Minimises waste, improves quality, and increases brand loyalty.
• Circular flow of income, expenditure and output

  Charts the flows of money between firms, households, Government, and banks.

  Injections:

  • exports, investment, Government spending

  Withdrawals/leakages:

  • imports, savings, and taxes
• Vertical integration advantages

  • Firms can increase their efficiency, through gaining economies of scale, which could reduce their average costs. This could result in lower prices for consumers.
  • Firms can gain more control of the market. Backwards integration can mean that firms can control the price they pay for their supplies, and they could raise the price for other firms
• Vertical integration disadvantages

  • Vertical integration can create barriers to entry, which might discourage or limit the entry of new firms. This could lead to a less efficient market, since the firm has little incentive to reduce their average costs when their market share is high.
• Horizontal integration advantages

  • Firms can grow quickly, which can give them a competitive edge over other firms in the market and gain a larger market share.
  • Firms can increase output quickly, so they can take advantage of economies of scale.
• Horizontal integration disadvantages

  • There could be disagreements in the objectives of the two firms which merged
• Conglomerate integration advantages

  • The conglomerate can reach out to a wider customer base, and market competition could be reduced.
  • The advantages of economies of scale, and particularly risk bearing economies of scale, can be considered.
• Conglomerate integration disadvantages

  • There is a risk of spreading the product range too thinly, and there might not be sufficient focus on each range. This might reduce quality and increase production costs.
• Long tail theory

  This change towards digital lowers geographical borders, making the world a smaller place. While small firms can find their audience, they are selling many different products to a few consumers
• Online retail advantages

  • low overhead costs
  • more convenience for consumer
  • consumer segmentation by analysing past purchases
  • Don't need to hire a salesmen
  • Price comparison sites
• Online retail disadvantages

  • Increased competition for firm
  • increase in demand for staff with digital skills. This could cause a problem for some firms, since there could be a skills shortage, and it could be expensive for businesses to train staff.
  • Need money to do online marketing in order to attract customers