business growth

• Firm growth


  • To make more money
  • To gain monopoly power
  • For greater security
• Economies of scale


  • Helps firms decrease their costs of production
  • Allows firms to sell more goods and make more revenue
• Firm growth


  Leads to larger profits
• Larger firm


  • Holds a greater share of their market
  • Can influence prices
  • Can restrict the ability of other firms to enter the market
• Monopoly power


  • Gives firms monopsony power to reduce their costs by driving down the prices of their raw materials
• Larger firm


  • Has more security as they can build up assets and cash
  • Sells a bigger range of goods in more than one local/national market
  • Less affected by changes to individual products or places
• Constraints on firm growth

  • Size of the market
  • Access to finance
  • Owner objectives
  • Regulation
• Principal-agent problem


  • Separation of ownership and control in large firms
  • Differing aims of owners (shareholders) and managers
• Owners want to maximise returns on investment by short-run profit maximisation
• Managers want to maximise their own benefits
• Firms are often not run to profit-maximise but to profit satisfice
• Private sector


  Owned and run by individuals or groups of individuals
• Public sector


  • Owned or controlled by local or central government
  • Purpose is to provide a service for UK citizens, not to make a profit
• For-profit organisations


  Run to make a profit and maximise financial benefits for shareholders
• Not-for-profit organisations


  Use any profit to support their aim of maximising social welfare and helping individuals and groups
• Organic growth


  Firm grows by increasing their output, e.g. opening new stores, increasing product range
• Advantages of organic growth

  • Integration is expensive, time-consuming and high risk
  • Firm keeps control over their business
• Disadvantages of organic growth

  • Firm may be unable to gain a market or asset through organic growth
  • Organic growth may be too slow for directors
  • Harder for firm to get new ideas
• Vertical integration


  Integration of firms in the same industry but at different stages of the production process
• Backward integration


  Merger takes the firm back towards the supplier of a good
• Forward integration

  Firm is moving towards the eventual consumer of a good
• Advantages of vertical integration

  • Increased potential for profit
  • Less risks as suppliers don't have to worry about buyers not buying and buyers don't have to worry about suppliers not supplying
  • With backward integration, can control quality of supplies and ensure reliable delivery, keeping costs low and allowing lower prices for consumers
• Disadvantages of vertical integration

  • Firm may have no expertise in the industry they took over
• Horizontal integration


  Firms in the same industry at the same stage of production integrate
• Vertical integration (forward)


  • Secures retail outlets
  • Can restrict access to these outlets for competitors
• Horizontal integration


  • AstraZeneca acquired ZS Pharma
  • Currys and PC Worlds
  • Arcadia (Topshop, Evans, Dorothy Perkins)
• Conglomerate integration


  Firms in different industries with no obvious connections integrate
• Conglomerate integration


  • General Electric
• Constraints of business growth

  • Size of the market
  • Access to finance
  • Owner objectives
  • Regulation
• Niche markets and markets for luxury/prestige items make it difficult for businesses to grow
• Firms use retained profits and loans to finance growth</b>
• Some owners may not want their business to grow further
• Regulation can prevent businesses from growing, e.g. limits on pharmacy numbers, competition law
• Demerger


  A business strategy where a single business is broken into two or more components to operate on their own, be sold or dissolved
• Demerger


  • Pepsi demerged Pizza Hut, KFC and Taco Bell
• Organic growth


  Internal growth, usually generated by gaining greater market share, product diversification, opening a new store, international expansion, investing in new technology/production machinery
• Inorganic growth


  External growth, usually takes place through vertical integration (forward or backwards), horizontal integration, or conglomerate integration
• Ways a firm can grow through vertical integration

  • Forward vertical integration
  • Backward vertical integration
• A diagram that illustrates how a firm can grow through forward or backward vertical integration
• Forward vertical integration


  Merger or takeover with a firm further forward in the supply chain (e.g. a dairy farmer merging with an ice-cream manufacturer)