3.1 - business growth

Created by

Maddie Jones

Cards (36)

Why do firms stay small?
-small market
-limited access to finance
-owner objective to retain control of the business
-lack of economies of scale
-individual, personalised experiences
-need for dynamic, responsive, service-led firm
Why do firms grow?
-to benefit from EOS
-to increase market share
-to reduce risk
-to meet managerial objectives
What is the principal-agent problem? 
Shareholders and managers have different objectives for their firms which leads to conflict between aims and policies of two involved.
What are private sector firms?
Part so the economy where the assets are owned by individuals and not the govt.
What are public sector firms?
Parts of the economy owned by society and regulated/provided by the govt.w
What are the main types of private sector organisations?
-sole proprietors
-partnerships
-joint stock companies
-cooperative societies
What is a profit organisation?
Aim to make or max profit
What is a non-profit organisation?
Private firms for which the primary motive is not profit and if they make profit, it gets reinvested
What are examples of non-profit organisations?
Charities, social enterprises
What is organic growth?
The increase in output and sales of a business using internal resources
How can a business achieve organic growth?
By buying new capital, taking on more workers or increasing working hours
What are advantages of organic growth?
-management has sound knowledge of the business
-firm can respond quickly to changes in the market
-no need for restructuring
-less risk than growth through mergers
What are disadvantages to organic growth?
-growth may be slower than through mergers/takeovers
-may decrease competitiveness of the business
-business might not take on new ideas or people
-the firm might get too specialised in areas that are becoming out of date
What is a good example of organic growth?
Walmart - expanded into every state of the US and then spread to countries all by cutting prices
What is external growth?
Expansion of a business through a merger or takeover
What are the risks of external growth?
-firm may have to go into debt to buy another firm
-risk of investigation by CMA
What is horizontal integration?
Firms at the same stage of production merge e.g. 2 Honda and Toyota.
Increases product range and helps to enter new markets
What are advantages of horizontal integration?
-gain EOS
-increases market share
-eliminates competition so firm can gain degree of monopoly power
-reduces risk of being bought out by rival company
-increases revenue for the business b/c of larger customer base
What are the disadvantages of horizontal integration?
-risk is focused on a narrow range of G+S
-diseconomies of scale may occur
-share price of firm might rise so the buyout is very expensive
-some workers may lose jobs if roles are duplicated
-some workers may have to move or travel further
-some assets might be sold off which could be wasteful
What is vertical integration?
2 firms at different production stages merge. Can be forward or backward.
What is an example of a vertically integrated company?
Starbucks - they own coffee bean farms, roasting plants, warehousing and distribution and retail outlets
What is backward vertical integration?
Firm mergers with supplier
What are advantages of backward vertical integration?
-control over raw materials means supply and quality are guaranteed
-other firms might be prevented from getting the supplies
-the mark-up the supplier makes can become profit from the buying firm
What are the disadvantages of backward vertical integration?
-firm might not need to buy all the supplies
-firm might not have specialist knowledge of production - diseconomies of scale might set in
-firm might find it hard to adapt to changes in consumer demand
What is forward vertical integration? 
Firm buying another firm in same production process but closer to the consumer
What are advantages of forward vertical integration?
-buying a retail outlet might guarantee that customers see a firm's products at their best
-the consumer may not be distracted by competition from other products
-market research is more effective and the firm can adapt in response to consumer preferences
What are the disadvantages of forward vertical integration?
-firm on its own might not have a wide enough range or choice from consumers
-firm might not have marketing and sales expertise
-risk of larger losses
What is a conglomerate integrate?
Firm buys another firm in a completely unrelated business
What are advantages of a conglomerate integration?
-spreads the risk - profitable areas can cross-subsidise loss-making areas
-different products do well at different parts of the business cycle.
-brands gain more recognition
What are disadvantages of conglomerate integration?
-may be a lack of expertise in new areas
-brands might become diluted
-differences in cultures may result in conflict and low productivity
What are constraints on business growth?
-govt regulation
-capacity constraints
-market constraints
-Vision constraints
-state of the economy
What is a demerger? 
The separation of a large company into 2 or more smaller companies.
May involve the dissolution of an earlier merger.
What are reasons for demergers?
-to focus on the core business
-to increase profit
-to raise finance
-to avoid diseconomies of scale
-to meet demands of regulators
What is the impact of demergers on businesses?
They can focus on their core business, raise funds from selling parts of the business and remove loss-making parts of the business
What is the impact of demergers on workers?
May be an increase in job security of loss-making parts of business are de-merged, a reduction in conflict between cultures and an increased focus on the business to increase profits but some may lose jobs
What is the impact of demergers on consumers?
Greater competition = lower prices, more focused businesses are able to better meet consumer needs but some parts of the service may be limited