Business growth

• What is a firm?

  An organisation which sells goods and/or services to consumers, usually with the aims of making a profit
• What is an economy of scale?

  A decrease in long-run average costs for a firm caused by an increase in the scale of production
• How does a very small market mean some firms remain small?

  If a firm is operating in a specialist area of a market, demand will be low and so the firm will remain small
• How does limited access to finance mean some firms remain small?

  Small firms might be regarded as high risk to banks, making them more unwilling to give loans to the firms
• How does owner objective to retain control of the business mean some firms remain small?

  Owners might want to retain complete control of their businesses, and so would be unwilling to expand
• How does a lack of economies of scale mean some firms remain small?

  There might be no incentive for a firm to grow if there are no potential cost savings
• How do individual, personalised services mean some firms remain small?

  Demand will be low because they offer a personal service, and customers only see one person
• How does a need for a service led firm mean some firms remain small?

  Firms which supply service led firms are often small as they only supply the one business and no others
• How is benefitting from economies of scale an incentive for firms to grow?

  Larger firms often have lower costs per unit of output in the long run
• How is increasing market share an incentive for firms to grow?

  A larger market share means that the threat of competitors is decreased, and larger firms have more market power, can control prices, and can retian consumer loyalty
• How is reducing risk an incentive for firms to grow?

  Larger firms might diversify to produce a range of products, as firms which specialise in one product face the risk of going out of business if there is a decrease in demand
• How is meeting marginal objectives an incentive for firms to grow?

  Firms might want to grow because the salaries of managers are related to sales revenue
• What are principals?

  Shareholders who own most large businesses, and who appoint agents to control these businesses on their behalf
• What are agents?

  Managers appointed by principals to control a business
• What is the principal agent problem?

  When the aims of the principals and agents conflict with each other, as principal aims are to maximise profits, wheras agent aims are often to increase sales at the expense of profit
• What are private sector firms?

  Firms in which the assets are owned by private individuals or groups, whose main aims are to make a profit due to not being able to operate otherwise
• What are public sector firms?

  Firms which are owned by the government, and who can operate without making a profit because the government provides revenue through taxation
• What are profit organisations?

  Organisations that aim to make or maximise profit
• What are non profit organisations?

  Organisations that have a different purpose than to make priavte profit, but who still have to cover their own costs
• 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, employing more workers, or increasing the hours they work
• What are the advantages of organic growth?

  The managers have a good knowledge of the business, the firm can respond quickly to changes in the market, there is no need for restructuring, and there is less risk than with growth through mergers
• What are the disadvantages of organic growth?

  Growth may be slower than through mergers, it might decrease the competetiveness of the business, and the business might not take on new ideas or workers
• What are external growths?

  The expansion of a business by merger or acquisition
• What is a merger?

  A firm buying out another firm by agreement
• What is an aquisition?

  A firm buying out another firm by takeover
• What is the main risk of mergers and acquisitions to firms?

  Financial risk, as the firm might have to take on debt to buy another firm
• What is horizontal intergration?

  An external growth where firms merge at the same stage of the same production process
• Why might a firm undergo horizontal intergration?

  The firms might not make exactly the same product, and would therefore want to increase the range of products they produce
• What are the advantages of horizontal intergration?

  It increases the economy of scale, increases market share, increases general revenue due to having more customers, eliminates a competitor allowing the firm to gain a degree of monopoly, and decreses the risk of the firm being bought by a rival company
• What are the disadvantages of horizontal intergration?

  Diseconomies of scale may occur, the share price of the firm might increase, some workers might lose thier jobs if their roles in the new bigger firm are duplicated, some duplicated assets might have to be sold
• What is vertical intergration?

  An external growth where firms merge at different stages of the production process
• What are the two types of vertical intergration?

  Backward vertical intergration and forward vertical intergration
• What is backward vertical intergration?

  When a firm merges with a supplier further in the production process to the customer
• What are the advantages of backward vertical intergration?

  The firm has control over natural resources so that supply is guarenteed, other firms might be prevented from taking the supplies, and the supplier can become a profit for the buying firm
• What are the disadvantages of backward vertical intergration?

  It is often expensive to buy the suppliers, the firm might not have specialist knowledge of production, and the firm might find it hard to adapt to changes in demand
• What is forward vertical intergration?

  When a firm merges with another firm closer in the production process to the customer
• What are the advantages of forward vertical intergration?

  The firm has control over the final product, the consumer might not be distracted by competition from other products, and firms can adapt in response to demand
• What are the disadvantages of forward vertical intergration?

  The firm might not have a wide enough range of choice for consumers, they might not have enough marketing expertise, and there is a risk of larger losses
• What is conglomerate intergration?

  When a firm buys another firm in an unrelated business, meaning it diversifies