3.1 Business Growth

Question 1

Define and give examples of the public sector

Answer 1

Wholly or partly state owned
i.e. NHS, Railway lines, hospitals, schools

Question 2

Define and give examples of the private sector

Answer 2

Owned by individuals, sole traders own the business or shareholders own the business according to their share allocation
i.e. Santander, M&S, Samsung

Question 3

Define Shareholder

Answer 3

An individual or business who has purchased shares in a business. Is entitled to dividend and rights of how the company is run

Question 4

Define Shareholder

Answer 4

Someone who owns a business

Question 5

Shareholder motives (principle)

Answer 5

Ownership of the business
Increase their returns
Dividends

Question 6

Define Dividends

Answer 6

A share of the profit in proportion to their ownership.
But firms have no legal requirements to pay dividends, they have to act in the best interest of the business (may choose to reinvest profits and shareholders don’t receive dividends)

Question 7

Director motives (agent)

Answer 7

Revenue Maximisation
Increased sales volume
Profit satisfice

Question 8

Define Sole trader

Answer 8

An individual who owns the business.
Unlimited Liability - meaning that personal assets are at risk.

Question 9

Sole Trader advantages

Answer 9

• easy to set up
• complete control over decisions
• keeps all the profit (incentive)
• doesn’t need to publish info
• can react to local consumers’ changes in taste/preference

Question 10

Sole trader disadvantages

Answer 10

• unlimited liability (assets at risk)
• difficult to raise capital to start or expand the B
• they have to work long, hard hours
• can’t benefit from EoS

Question 11

Define Private Limited Company

Answer 11

A business owned by private investors (shareholders)
Shares aren’t on a PUBLIC stock exchange
Shareholders have limited liability

Question 12

LTD advantages

Question 13

LTD Disadvantages

Question 14

Define Public Limited Company

Answer 14

A business owned by public investors (shareholders) and whose shares are traded on a public stock exchange.
Limited liability

Question 15

PLC Advantages

Question 16

PLC disadvantages

Answer 16

• required to publish detailed accounts and other financial information to the public. This information is expensive to produce and reveals details of the business to the public and competitors
• he cost of floating a business on the Stock Exchange is high and it is a long process

Question 17

What is incorporated

Answer 17

When a business is formed as a company, it is given a separate legal identity

Question 18

Define limited liability

Question 19

Define the rights issue

Answer 19

When a listed company issues more shares in exchange for more investment

Question 20

Principle Agent Problem - Divorce of ownership from control

Answer 20

one group (agent), makes decisions for the other group (principles)
The differing aims of different stakeholders causes problems
Shareholders want to maximise the return on their investment (maximise SR profit)
Managers, Executives, Employees want to maximise their own benefits (i.e. higher salary)

Question 21

Reasons for business’ to grow

Answer 21

-Raise profits:
-Reduce costs: EoS = lower LRAC
-Minimise risk:Diversify the brand into different sectors with new product lines
-Increase market power:
-Managerial objectives: maximising sales, revenue, growth but not profit

Question 22

Reasons for business’ to stay small

Answer 22

-Niche markets: bespoke market products is specialist and demand is low
-Avoid diseconomies of scale setting in
-Regualtions and interventions
-Owner objectives: remain in control

Question 23

Define organic growth

Answer 23

firms grow from within over time by utilising their own resources as profits are retained and reinvested in the business. Companies such as Lego and John Lewis have pursued this strategy.​

Question 24

Define inorganic growth

Answer 24

A firm may be taken over, acquire another firm or merge with another firm. The firm may enter into a joint venture agreement also.​

Question 25

Advantages of Organic Growth

Answer 25

-Business grows at a steady and predictable rate
-Less risk, as it builds on the business’ existing strengths (ie - known customers)
-Can be financed through internal funds (retained profits) as growth is achieved in increments

Question 26

Disadvantages of Organic growth

Answer 26

-Can be difficult to raise funds through retained profits and then potential to grow may be limited
-Franchises can be hard to manage effectively
-Slow growth may be achieved, shareholders may prefer more rapid growth to maximise their dividends

Question 27

Define vertical integration

Question 28

What are the 4 types of vertical integration
(car manufacturer example)

Answer 28

-Horizontal I: Firms are in the same industry and at the same stage of production (2 car manufacturers merge)
-Backawards I: A firm takes over a supplier (car manufacturer takes over windscreen supplier)
-Forwards VI: A firm takes over a customer (car manufacturer merges with sales dealership)
-Conglomerate I (diversification): I occurs between firms in unrelated industries (car manufacturer merges with bakery)

Question 29

Advantages of vertical integration

Question 30

Disadvantages of vertical integration

Question 31

Define Horizontal Integration

Answer 31

The purchase of one firm by another firm at the same point in the supply chain, in either the same or different industries

Question 32

Advantages of Horizontal integration

Answer 32

Removes threat of competition
Increases market share
Larger target market
Reduced risk of being bought out
Cost savigns through synergy

Question 33

Disadvantages of Horizontal integration

Answer 33

X-inefficiency due to size of firm
Higher failure rate
Potential diseconomies of scale
Duplicated roles=redundancy
Duplication of assets= assets go unused or sold off for cheap

Question 34

Supply chain

Answer 34

Is the pathway that a product passes through, from initial production, to manufacturing, retailing and to the counter.

Question 35

How can mergers attract the CMA’s attention