3.1 Business Growth Flashcards
Reasons why firms grow?
Owners desire to run a large business
Desire for higher profit
Desire for reduced costs from EoS
Desire for strong market power
Opportunities for product diversification
Larger firms have easier access to finance
Reasons why small firms exist?
Offer more personalised experience
Unable to access finance
Niche market
Low barriers to entry in the market
Rapid growth can cause DEoS
Owners goal is profit satisficing
What is the principle agent problem?
Occurs when one group makes decisions on behalf of another, often placing their prioritise above the other groups
How can the principle agent problem be solved?
By granting share options to managers so their interests align with the businesses
What is organic growth?
Growth usually generated by gaining market share, product diversification, open ending a new store, internal expansion
What is Inorganic growth?
External growth that takes place by vertical integration, horizontal integration or conglomerate integration
What is vertical integration?
When a firm takes over another firm in a different part of the supply chain
What is horizontal integration?
When a firm takes over another at the same level in the supply chain
What is conglomerate integration?
When a firm takes over another in a completely different industry
What are the advantages of organic growth?
Pace is manageable, less risky, avoids DEos
What are the disadvantages of organic growth?
Can be slow, May not benefit from EoS, Access to finance may be limited
Advantages of vertical integration?
Reduces cost of production, make firm more competitive, reduces risk of raw materials, quality can be controlled
Disadvantages of vertical integration?
DEoS, culture clash between firms, Possible little expertise in running the new firm
Advantages of horizontal integration?
Rapid increase of market share, EoS, reduces competition, existing knowledge of industry
Disadvantages of horizontal integration?
DEoS, culture clash