BUSINESS GROWTH

• Firm growth


  Reasons why some firms tend to remain small and why others grow
• Reasons for firm growth

  • Make more money
  • Gain monopoly power
  • Greater security
• Firm grows


  Experiences economies of scale, decreases costs of production, sells more goods, makes more revenue, makes larger profit
• Larger firm


  Holds greater market share, can influence prices, restrict ability of other firms to enter market, have monopsony power to reduce costs
• Larger firm


  Has more security, can build up assets and cash, sells a bigger range of goods in more markets, less affected by changes
• Not all firms grow, some remain small due to constraints: size of market, access to finance, owner objectives, regulation
• Principal-agent problem


  Separation of ownership and control in large firms, where owners want to maximise returns but managers want to maximise their own benefits
• Firms are often not run to profit-maximise but to profit satisfice due to principal-agent problem
• Enron scandal was an extreme example of principal-agent problem
• Private sector


  Part of economy owned and run by individuals or groups, including sole traders and PLCs
• Public sector


  Part of economy owned or controlled by local or central government, to provide services for citizens, not for profit
• For-profit organisations


  Private sector organisations run to make a profit and maximise financial benefits for shareholders
• Not-for-profit organisations


  Private sector organisations that use any profit to support their aim of maximising social welfare and helping individuals/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 business
• Disadvantages of organic growth


  • Firm may lack expertise or assets to gain through organic growth
  • Organic growth may be too slow for directors
  • Difficulty getting new ideas
• Vertical integration


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


  Integration taking firm back towards supplier of a good
• Forward vertical integration


  Integration taking firm towards eventual consumer of a good
• Advantages of vertical integration

  • Increased potential for profit
  • Less risk as suppliers/buyers don't have to worry
  • Can control quality of supplies and ensure reliable delivery
  • Can restrict access to retail outlets for competitors
• Disadvantages of vertical integration


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


  Integration of firms in the same industry at the same stage of production
• Advantages of horizontal integration


  • Reduces competition, increases market share, allows specialisation and rationalisation, firm has existing expertise
• Disadvantages of horizontal integration


  • Increases risk as firm is 'placing all eggs in one basket'
• Conglomerate integration


  Integration of firms in different industries with no obvious connections
• Advantages of conglomerate integration

  • Useful where no room for growth in present market
  • Reduces risk as range of products
  • Easier for individual parts to expand
• Disadvantages of conglomerate integration

  • Firm may have no expertise in the new markets
• Constraints on business growth

  • Size of the market
  • Access to finance
  • Owner objectives
  • Regulation
• Demerger


  Business strategy where a single business is broken into two or more components to operate separately, be sold or dissolved
• Reasons for demergers


  • Lack of synergies between different parts of the business
  • Value of the company/share price is higher when split up
  • Allows more focused companies
• Impacts of demergers


  • Workers could gain or lose through promotions or job losses
  • Businesses may become more efficient but lose economies of scale
  • Consumers may gain from innovation and efficiency but could also face higher prices and reduced quality/range