business growth

Question 1

reasons why businesses want to grow

Answer 1

economies of scale- decrease cost of production- sell more goods
larger firms have more shares of the market to control price and output
monopoly/ monopsony power to drive down prices or raw materials
more security e.g. retained profits

Question 2

why a firm stays small

Answer 2

size of the market
informal market for labour- lower wages
access to finance
owner objectives
regulation
diseconomies of scale- more efficient
customers may want more personal services
niche market to make the good PED inelastic

Question 3

principal agent problem meaning

Answer 3

when agent makes decisions for the principal but is inclined to act in their best interest rather than the principal’s
shareholders want to profit max but directors/ managers/ CEOs want to revenue max to activate bonuses
if they don’t meet the required profits they will get fired so they profit satisfice to satisfy the share holders

Question 4

how to deal with principal agent problem

Answer 4

pay the CEO in shares of the company
profit related pay and not revenue related pay
performance related pay

Question 5

private sector meaning

Answer 5

owned and run by individuals/ group of individuals

Question 6

public sector meaning

Answer 6

owned or controlled by the government

Question 7

profit maximisation meaning

Answer 7

maximise financial benefits for their shareholders
quantity is set where MC = MR

Question 8

non profit firm goals

Answer 8

aim to maximise social welfare
no one owns shares
staffed by volunteers
money received through charities
when liquidated money goes to help people

Question 9

organic growth meaning

Answer 9

firm increasing its size by increasing their output
e.g. under armour, whitbread, Lego

Question 10

how can firms reach organic growth

Answer 10

putting profits back into the firm to increase spare capacity
borrowing money from banks
issuing shares
development and launch of new products
finding new markets
growing consumer demand through ads and marketing

Question 11

pro of organic growth

Answer 11

firm can keep control over their business- reduces conflicts and hostile takeover
less risky
sustainable- does not build up debt as they use their own funds

Question 12

con of organic growth

Answer 12

long term strategy
slow growth
firm may rely on strength of the market

Question 13

external growth how its reached

Answer 13

achieved through mergers or acquisition

Question 14

horizontal integration meaning

Answer 14

joining 2 firms in the same industry and the same stage of production
e.g. Sainsburys and asda
Facebook, WhatsApp, Instagram

Question 15

pro of horizontal integration

Answer 15

exploit internal economies of scale (lowest part on LRAC)
cost saving
revenue synergies
wider range of products/ diversification
cheaper to buy well known brand than starting from scratch

Question 16

con of horizontal integration

Answer 16

increases risk for the business if one of them fail
paying too much
cost rises as firm is larger so more managers
poor management
workers may leave
diseconomies of scale

Question 17

vertical integration meaning

Answer 17

joining 2 firm in the same industry but at different stages of production

Question 18

backwards vertical integration meaning

Answer 18

outlet takes over supplier

Question 19

forwards vertical integration meaning

Answer 19

supplier takes over outlet

Question 20

pro of vertical integration

Answer 20

access to raw materials
increases efficiency through gaining economies of scale
control of supply chain so lower unit cost and improved quality
can decrease competition through not selling raw materials to other competing firms

Question 21

con of vertical integration

Answer 21

diseconomies of scale
barrier to entry for other firms so less competition
paying too much to join
more management so more cost - could lead to wrong info getting passed along or long time to make decisions
poor management
workers may leave
info gaps of other firm

Question 22

conglomerate integration meaning

Answer 22

2 firms joining in completely unrelated markets

Question 23

pro of conglomerate integration

Answer 23

reduces risk- different markets
more options to expand and get finance
both firms become stronger
gain more customers

Question 24

con of conglomerate integration

Answer 24

firms do not have expertise in the market into which they buy
pay too much for firm
poor management
poor quality goods as focus is on may things

Question 25

factors which limit firm growth

Answer 25

the size of the market
access to finance
owner objectives
regulation

Question 26

demerger meaning

Answer 26

when a business is broken up into 2 ore more components
e.g. pepsi demerger of pizza hut, kfc and taco bell to focus on competition with coca cola

Question 27

partial demerger meaning

Answer 27

the parent company retains a stake in the demerged business

Question 28

reasons for demergers

Answer 28

focus on core business
lack of synergies
reduce the risk of diseconomies of scale
raise money
reduce attention of regulators
government intervention

Question 29

impact of demergers on the business
employees
consumer

Answer 29

long term- higher returns as cost savings
increase specialisation- increase efficacy
make profit by selling business

new manager roles

lower prices
better quality