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ECON MICRO > Business Growth > Flashcards

Business Growth Flashcards

1
Q

Reasons why firms seek growth

A
  • profit - produce more output = higher revenue
  • costs - economies of scale
  • higher market share = higher price setting power + influence on entrants to the market = lower comp
  • diversification = less vulnerable to sudden shocks
  • often translates to monopsony power
  • managerial objectives - bonuses for targets
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2
Q

Reasons why some firms choose to remain small

A
  • worried about experiencing diseconomies of scale
  • owners don’t want extra work and risks involved in expanding
  • legal requirements get stricter as companies get bigger
  • owner objectives and regulation
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3
Q

Types of firms

A
  • private sector
  • public sector
  • not for profit
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4
Q

Reasons why some firms must remain small

A
  • unable to finance expansion
  • operate in niche market like luxury yachts
  • skills knowledge and expertise required may be lacking
  • firm may lack resources to cope with added regulations
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5
Q

Internal/Organic growth

A
  • successful firms gain profits which are reinvested into the business for it to expand further.
  • such as a successful marketing campaign bringing in more profits.
  • can be diversification
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6
Q

External/Inorganic growth

A

Merging or acquiring other firms

  • Merge - coming together as equals
  • Acquiring - a takeover, could be hostile
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7
Q

Horizontal merger

A

between firms operating in the same industry and at the same stage of the production process: for example, the merger of two car assembly firms

Eg. takeover of Rover by BMW

Increases market power as less competition

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8
Q

Vertical merger

A

Can be upstream or downstream
Backward integration = merging with a firm that is involved in an earlier part of the production process
- eg, car company merges with component supplier
Forward integration = merging with firm that is in future part of the production process.
- eg, car and large distributor

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9
Q

Conglomerate merger

A

involves the merging of two firms that are operating in quite different markets or industries.

For example, Unilever and Nestlé operate in a wide range of different markets, partly as a result of acquisitions.

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10
Q

Advantages of organic growth

A
  • lowest risk and control remains unchanged
  • firms can build on existing strengths and continue to meet consumer expectations
  • good for workers morale
  • more job opportunities within the firm
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11
Q

Disadvantages of organic growth

A
  • tends to be slower
  • sometimes another firm has a market or asset, unable to gain through organic growth, e.g. European to asian market move.
  • is from building on existing knowledge of existing capital, so less scope for innovation
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12
Q

Advantages of a horizontal merger

A
  • providing instant access to higher economies of scale
  • reduce competition and increase market share, giving higher market influence
  • firms can specialise and rationalise, reduce duplicated areas of the business
  • grow in market where it already has expertise

- higher market share + power

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13
Q

Disadvantages of a horizontal merger

A
  • gains in market share may attract attention of regulator
  • increase risks as all eggs in one basket type vibe
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14
Q

Advantages of a vertical merger

A
  • offers greater control over the supply chain
  • firm is less subject to interruptions in supply = less risks
  • more control over the margins at each stage of production process
  • forward integration secures retail outlets and can restrict access to these outlets for competitors
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15
Q

Advantages of a conglomerate merger

A
  • diversified portfolio of production activities may leave firm less vulnerable to recession
  • more possibilities for cost savings, if firms can find synergies in core business functions such as accounting/ marketing
  • firms may have no expertise in the industry they took over.
  • useful for firms where theres no room for growth in the present market
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16
Q

Disadvantages of a conglomerate merger

A
  • may be managerial diseconomies if management team do not understand all aspects of the new diversified business
17
Q

Why may mergers not be successful

A
  • costs of integrating underestimated
  • computer/ production systems not compatible
  • not as easy to make staff cuts
  • cultures may clash
18
Q

not for profit

A

Any profit they do make is used to support their aim of ​maximising social welfare

19
Q

example of vertical integation

A

tesco 3.7$ billion takeover of booker 2018

20
Q

constraints of business growth

A
  • size of the market
  • access to finance
  • owner objectives
  • regulation
21
Q

size of market

A
  • limited to a certain size and so not all businesses are able to mrs produce as their goods would not be bought by consumers.
  • this effect happens in every market, from niche to general ones.
22
Q

access to finance

A

firms use two main ways to finance growth: retained profits and loans. If firms do not make enough profit or have to give out too much to shareholders, they will not be able to use retained profits to grow. Banks may be unwilling to lend firms money, unequal between small and large.

23
Q

owner objectives

A

some owners may not want their business to grow any further as they are happy with their current profits and do not want the extra risk or work that comes with gowth

24
Q

regulation

A

in some markets, gov may introduce regulation which prevents businesses from growing.

25
Q

A demerger is a

A

business strategy in which a ​single business is broken into two or more components​, either to operate on their own, to be sold or to be dissolved.

e.g. pepsi demerge with pizza ht, kfc and taco bell

26
Q

Reasons for demergers

A
  • lack of synergies
  • value of the company/share price
  • focussed companies
  • may also want to avoid attention from competition authorities
27
Q

lack of synergies

A
  • different parts of the company have no real impact on each other, and fail make each other more efficient
  • Lack of synergy means managers splitting time between areas which are so different it could lead to DEoS; firms may split to avoid diseconomies.
28
Q

Value of the company/share price:

A

Some companies demerge because the value of the separate parts of the company is worth more than the company combined.

29
Q

Focused companies:

A

Some people believe if the company and the management are more focussed on individual markets they become more efficient and successful, and make higher profits.

30
Q

impacts of demerger on worker

A

​Workers could gain or lose through a demerger. Separate firms may need their own managers and leaders so people could get a ​promotion​. However, the goal of making the firm more efficient may result in ​job losses​.

31
Q

impact of demerger on business

A

Concentrating on a smaller core business may enable it to be more efficient and concentration may lead to more ​innovation and surviving higher competition. However, the smaller size of the business could lead to a ​loss of economies of scale ​and reduce efficiency.

32
Q

impact of demerger on consumers

A

They may gain from innovation and efficiency, leading to ​better products and cheaper prices​. but, demerged firms may be less efficient through loss of EoS or ​raise prices/reduce quality or range of goods ​as they become motivated by profits.

33
Q

Pepsi demerger

A

1997, Pepsi announced a demerger of its Pizza Hut, KFC and Taco Bell restaurants to focus on competition with Coca Cola. This was welcomed by shareholders as the restaurants had failed to live up to expectations

34
Q

Principal agent problem

A

Enron scandal 2001, executives used loop sales to hide billions of dollars in debt from directors. Share prices fell from 100£ to £1 in just over a year

35
Q

Disadvantages vertical merger

A
  • no expertise?
  • regulation

ECON MICRO (34 decks)

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