Growth and types of Firms

Question 1

What are the 5 main reasons for firms wanting to grow, and why?

Answer 1

1) Profits: The larger the firm, the higher the sales, allowing the firm to generate higher profits.
2) Costs: Operating on a larger scale can lead to lower unit costs, due to economies of scale.
3) Market power: A larger firm is more able to control its market and reduce competition.
4) Reducing risk: Larger firms can operate in more markets, minimising the impact of one market/produce becoming unprofitable.
5) Managerial motives: Owners and managers may have the goal of achieving growth.

Question 2

What is the divorce of ownership from control?

Answer 2

When the owners of a company, such as its shareholders, do not have direct control over the company’s operations and management.

Question 3

What is the principle-agent problem?

Answer 3

When the owners, e.g. shareholders, have conflicting aims with the managers/directors who run the business.

Question 4

What are the 6 main reasons why a firm may want to stay small?

Answer 4

1) A lack of finance for expansion.
2) They may be a monopoly, so there is no incentive to grow.
3) Low barriers to entry.
4) Wants to avoid diseconomies of scale.
5) They provide a personal service.
6) They supply niche products.

Question 5

Why may firms producing niche products not want to grow?

Answer 5

Niche products are have an inelastic PED, and an elastic YED. This means that a price change will not greatly impact quantity demanded, so there is no great need for a business to expand in order to reduce costs.

Question 6

What is a public sector organisation?

Answer 6

Organisations that are owned and controlled by the state.

Question 7

What is are some examples of public sector organisations (5)?

Answer 7

1) Civil service departments, such as the Home Office.
2) Public corporations, such as Highways England.
3) National regulatory authorities, such as Ofcom.
4) Local authorities.
5) Trusts, such as the NHS.

Question 8

What are private sector organisations?

Answer 8

Organisations owned by individuals or other companies.

Question 9

What are the potential aims of a public sector organisation (4)?

Answer 9

1) Provide a service to the public.
2) Achieve value for money for tax payers.
3) To regulate the actions of private sector organisations.
4) Social/ethical objectives.

Question 10

What are the potential aims of a private sector organisation (5)?

Answer 10

1) Profit maximisation.
2) Sales growth.
3) Survival.
4) Satisficing (making acceptable, not maximising, profits).
5) Charity.

Question 11

What is organic/internal growth?

Answer 11

When a firm achieves growth by increasing output/enhancing sales internally.

Question 12

What is integration/external growth?

Answer 12

When growth is achieved by two firms joining together, through a merger, or an acquisition.

Question 13

What is a merger?

Answer 13

When two or more firms join together under one ownership.

Question 14

What is an acquisition/takeover?

Answer 14

When one firm purchases another firm.

Question 15

What is, and what are the two types of, vertical integration?

Answer 15

Vertical integration is the integration of two or more firms at different production stages within the same industry.
The two types are:
1) Backward vertical integration: A firm integrates with a business operating at an earlier stage of the production process. E.g. A bread manufacturer merges with a farm producing wheat.
2) Forward vertical integration: A firm integrates with a business at a later stage in the industrial process. E.g. Coca-Cola’s purchase of Costa Coffee in 2018, to distribute Coca-Cola products.

Question 16

What is horizontal integration?

Answer 16

When two firms at the same stage of production and within the same industry (e.g. two supermarket chains) integrate.

Question 17

What is conglomerate integration?

Answer 17

When two firms with no common interests integrate. E.g. Amazon and Whole Foods.

Question 18

What are the 3 main advantages of organic growth?

Answer 18

1) Cheaper than other forms of external growth.
2) Can be financed through internal sources, e.g. profits, other than more expensive forms, such as a loan.
3) Allows growth at a sustainable rate.

Question 19

What are the 2 main disadvantages of organic growth?

Answer 19

1) A slow method - shareholders may demand more rapid growth.
2) Growth achieved may be dependant on the market, therefore out of the control of the firm.

Question 20

What are the 4 main advantages of vertical integration?

Answer 20

1) Can take advantage of some economies of scale (e.g. financial economies) leading to lower prices for consumers.
2) Reduced risks, as firms can control their markets.
3) Backward vertical integration gives a firm more control/security over its supplies.
4) Forward vertical integration gives a firm more control over prices it can change.

Question 21

What are the 3 main disadvantages of vertical integration?

Answer 21

1) Communication and co-ordination problems can arise (diseconomies of scale).
2) Problems can arise if the different firms have different corporate cultures.
3) Some workers may leave the firm.

Question 22

What are the 3 main advantages of horizontal integration?

Answer 22

1) Reduced average costs, due to economies of scale.
2) Reduced competition in the market.
3) Allows growth in a market where the firm already has knowledge/expertise.

Question 23

What are the 3 main disadvantages of horizontal integration?

Answer 23

1) Most horizontal mergers/takeovers fail.
2) Communication and co-ordination problems can arise (diseconomies of scale).
3) Problems can arise if the different firms have different corporate cultures.

Question 24

What are the 3 main advantages of conglomerate integration?

Answer 24

1) A reduction in risk, as firms are not as dependant on movements in one market.
2) Easier to expand further due to greater access to finance.
3) Improved skill levels, as successful senior managers can be transferred to different parts of the organisation.

Question 25

What are the 3 main disadvantages of conglomerate integration?

Answer 25

1) Lack of expertise in the new type of business.
2) Consumers may choose not to use the new firm, as it has a different identity to the original firm.
3) Shareholders may not get great value for money. Firms can pay too much when buying a business.

Question 26

What are the 4 main constraints on business growth?

Answer 26

1) The size of the market.
2) Access to finance.
3) Owner objectives.
4) Regulation.

Question 27

How can the size of a market limit the growth of a firm?

Answer 27

Just because a firm is successful, does not mean that it can expand, depending on its market size. If a market is small, there are few opportunities for a firm to grow.

Question 28

How can access to finance limit the growth of a firm, and why may small firms find it harder to access finance?

Answer 28

1) Businesses need finance in order to grow, and can use profits, loans, overdrafts, etc to finance growth.
2) Larger firms have greater access to finance as they have greater equity, and pose less risk to lenders. Smaller firms may find it harder to gain access to loans, and will not have large amounts of retained profits to reinvest.

Question 29

How can owner objectives limit the growth of a firm?

Answer 29

Some owners have other objectives other than growth, with some being satisfied with their current size. Disagreements amongst owners can also limit opportunities for growth.

Question 30

How can regulation limit the growth of a firm?

Answer 30

Some government intervention is used to limit the growth of firms in some sectors. E.g. imposing a minimum price will reduce the quantity demanded of a good, if it is elastic.

Question 31

What is the Competition and Markets Authority (CMA)?

Answer 31

A UK government organisation, that aims to make markets competitive and to ensure that firms operate in public interest.