3.1 Business Growth

• Market conditions


  • The nature of the market in which a firm operates can have a significant impact on its growth potential. If a market is saturated with competitors, it may be difficult for a new firm to gain a foothold and grow. If there is high demand and low competition, a new firm may be able to quickly grow and expand.
• Resources


  • The availability of funding, technology, and skilled labour can play a crucial role in a firm's ability to grow. Smaller firms may have limited access to these resources, which can hinder their growth potential.
• Management style


  • Firms with visionary leaders who are willing to take risks and innovate may be more likely to grow than those with more conservative leaders who are content with maintaining the status quo.
• Competitive advantage


  • Firms with a unique product or service offering may be able to grow more quickly than those without one. This advantage can allow them to capture market share and expand their customer base.
• Market segmentation


  • Some firms may choose to remain small to focus on serving a specific niche market. These firms may be able to achieve a high level of customer loyalty and satisfaction, which can lead to long-term success.
• Risk aversion


  • Some firms may choose to remain small because they are risk-averse and prefer to avoid the potential pitfalls that come with growth. These firms may prioritize stability and profitability over growth.
• The decision to remain small or to pursue growth depends on a variety of factors, including market conditions, resources, management style, competitive advantage, market segmentation, and risk tolerance.
• Divorce of ownership from control


  A situation in which the owners of a company, or its shareholders, are not involved in the day-to-day management and decision-making of the company. Instead, this responsibility falls to professional managers who may or may not have a significant ownership stake in the company.
• Separation of control and ownership


  • The separation of ownership and control means that shareholders have limited control over the management of the company. This can create a conflict of interest between shareholders and managers, as managers may prioritize their own interests over those of the shareholders.
• Agency costs


  • The costs associated with monitoring and controlling the actions of managers. Shareholders may need to incur these costs to ensure that managers are acting in their best interests.
• Managerial discretion


  • Professional managers may have more discretion to make decisions without input from shareholders. This can be beneficial if managers have specialized knowledge or experience, but it can also lead to decisions that prioritize the interests of managers over those of shareholders.
• Lack of accountability


  • The separation of ownership and control can result in a lack of accountability. If managers are not held accountable for their decisions, they may be more likely to engage in unethical or illegal behaviour.
• Principal-agent problem


  An economic issue that arises when one person or entity (the principal) hires another person or entity (the agent) to act on their behalf. The problem is that the agent may have different goals or incentives than the principal, and this misalignment can lead to conflicts of interest and suboptimal outcomes.
• Principal-agent problem in different fields


  • Corporate governance: Shareholders hire executives to run the company, but executives may prioritize their own interests over those of shareholders.
  • Politics: Voters elect politicians to represent their interests, but politicians may prioritize the interests of donors or party leadership.
  • Healthcare: Patients hire doctors to provide medical treatment, but doctors may over-treat or over-prescribe to maximize revenue.
  • Education: Parents hire teachers to educate their children, but teachers may focus on test scores rather than providing a well-rounded education.
• Private organizations


  Owned by individuals or groups of individuals who invest capital into the business with the expectation of earning a profit. They are not publicly traded and are typically owned by a small number of individuals or families.
• Non-private organizations


  Generally owned by the government, non-profit organizations, or other public entities. They may be established to provide services to the public or to advance a particular cause or interest, rather than to generate profits for their owners.
• Privatization has been a significant economic and political issue in the UK over the last 40 years, with different governments pursuing different levels and approaches to privatization.
• Profit organizations


  Businesses that are established with the primary objective of making a profit for their owners or shareholders.
• Non-profit organizations


  Established with the primary objective of serving a social or public cause, rather than generating a profit.
• Examples of non-profit organisations in the UK


  • British Red Cross
  • The National Trust
  • Oxfam
  • The Royal Society for the Prevention of Cruelty to Animals (RSPCA)
  • The British Heart Foundation
  • Citizens Advice
  • Shelter
  • Macmillan Cancer Support
  • The Royal National Lifeboat Institution (RNLI)
• medium profit of small and medium sized enterprises (SMEs) in the UK in 2014 was £8,000

  in 2021 it was approximately £11,000, with SMEs in the property and business services and wholesales and retail sectors having the highest average profit (£13,000)

  in 2022, the average profit made by SMEs in the UK amounted to approximately £12,000, with SMEs that employed between 50 and 249 people making a medium profit of around £312,000 compared with those with zero employees that had a profit of around £10,000
• small firms: 0-50 employees

  medium firms: 50-249 employees
• why do many small businesses survive and grow - by choice


  they may have a local monopoly which may not be replicated if they expanded on a regional/national level

  to avoid diseconomies of scale

  to keep objectives clear and consistent

  owner(s) may prioritise a good work life balance

  to stay out of sight of larger firms who are pursuing takeovers
• why do many small businesses survive and grow - forced to


  the market may have low barriers to entry (factors that prevent new firms joining a market)

  firms may lack the finance to expand - bank may view them as risky to lend to or small profits to reinvest

  demand for their product may have reached its upper limit

  owners/managers may lack the skills and expertise to grow the firm further
• social enterprises


  a not-just-for-profit business created to address a social problem

  profits are reinvested for one or more social purposes in the community, rather than the need to satisfy investors

  2013, research found that there were 70,000 social enterprises in the UK contributing over £18bn to the economy and employing hundreds of thousands of people

  examples of social enterprises: The Big Issue Magazine, The Eden Project in Cornwall, Divine Chocolate a Fairtrade Cooperative
• not for profit and not for dividend firms


  not for profit businesses are charities, community organisations that are run on commercial lines

  examples are NSPCC, foodbanks, local churches
• Network Rail is an example of a not-for-profit firm

  it owns, operates and develops Britain's railway infrastructure - 20,000 miles of track, 30,000 bridges, tunnels and viaducts and thousands of signals, level crossing and stations

  May 2021, the Government announced its intent to replace Network Rail in 2023 with a new public body called Great British Railways - in 2022, it was announced that this will be delayed until 2024

  majority of funding comes from a mix of direct grants and borrowing from the UK and Scottish governments and payments from train and freight operators
• Network Rail

  1. stated purpose is to deliver a safe, reliable and efficient railway for Britain
  2. company limited by guarantee - whose debts are secured by the government
  3. a 'not-for-dividend' company - profits are invested in the railway network
  4. train operating companies Network Rail for use of the rail infrastructure when running services
  5. Network Rail is given targets for punctuality and safety
  6. 2012-13, Network Rail made an operating profit of just over £2bn on total revenues of more than £6bn; in 2021-22 operating profit was just under £3bn in total revenues of £9.5bn
• Corporate Social Responsibility (CSR)


  happens when companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis
• why are firms embracing CSR

  • altruism - being a good citizen
  • contracting benefits - e.g. helps recruit, motivate and retain employees
  • customer related motivation - attract customers, brand positioning
  • lower production costs - packaging, energy usage
  • risk management - address potential legal or regulatory action
  • improved access to capital - e.g. the rise of ethical investment firms looking to make equity investments in companies with strong CSR reputations
• shares/equity/stock: a chunk ("share") of a limited company

  economists use the term "firm" as it refers to all types of ownership

  a limited company (private or public) has a specific legal position that means the 'company' is separate in the eyes of the law from the owners

  dividends: paid to shareholders, their "share" of the firm's profits

  shareholders (usually) have voting rights to appoint the managers of the company and make some decisions - can lead to the Principle Agent problem
• principle agent problem


  an asymmetric information problem - the owners of a firm often cannot observe directly the day-to-day decisions of management

  principle (owner of the business) - hires an agent (e.g. sales or finance manager) - managers (may have different business objectives)

  decisions and performance of the agent are costly and difficult to monitor
• overcoming the principle agent problem


  what is in the best interest of the management is not necessarily the same as what is in the optimum interests of the shareholders, strategies involve trying to align the aims of these two different stakeholders

  • employee share ownership schemes
  • long term employment contracts for senior management
  • long term stock commitment
• overcoming the principle agent problem - employee share ownership schemes


  John Lewis and Waitrose have a highly-regarded partnership model

  stock options might lead to perverse behaviour - e.g. deliberate attempts to hike up share prices through illegal action
• overcoming the principle agent problem - long term employment contracts for senior management


  security of tenure might encourage managers to take decisions in the long term best interests of the business
• overcoming the principle agent problem - long term stock commitment


  Apple's new policy (2018) requires senior executives at Apple to hold three times their annual base salary in stock, and executives have to keep this salary in stock for a minimum of 5 years to satisfy the requirement
• agency problem


  possible conflicts of interest that may result between shareholders (principle) and the management (agent) of a firm
• stakeholders


  customers, managers, employees, shareholders, debt holders and the government
• stakeholder conflict


  when different stakeholders have different objectives, firms have to choose between maximising one objective and satisfactorily meeting several stakeholder objectives (satisficing)
• private firms


  organisations that are operated and owned by private individuals or companies