3.1 Business Growth Flashcards
(46 cards)
Why do firms stay small?
3.1.1.a
- Avoid diseconomies of scale
- as organisation structure becomes more hierarchical & chain of command grows, communication slows.
- larger company may suffer x-inefficiency
- or may operate in a large formal market where they pay higher wages than smaller firms using informal markets - Unable to compete on price against larger industry competitors with high barriers to entry which enables them to achieve lower operation costs, therefore lower prices.
- patent
- economies of scale
- brand loyalty
- vertical integration (no access to suppliers) - Changing technology allows small firms the same cost advantages as large firms in reaching customers e.g. internet
- high street, high fixed costs of physical stores - Niche markets
- small firm may create a niche market
- can use their relatively price inelastic demand to charge higher prices
e. g. smaller cafe using locally sourced food over multinational company like Starbucks - Nature of the market
e. g. monopolistic competition. Small firms can hold some degree of monopoly power e.g. local hair salons/takeaways - Competitive advantage
- small firms offer more personal, local, family business or excellent customer service.
- opening hours may suit a small town e.g. corner shop - Economies of scale relative to market size
- large firms may only experience small economies of scale compared to their size
- can make their costs higher than smaller firms where minimum efficient scale is low. - Lack of finance and/or retained profits to grow
- Different objectives e.g. cooperatives, avoid risk, family firm
- Dynamism of small firms (easier to innovate)
- Tax breaks, VAT thresholds & other gov incentives for small firms
- Avoid attention of competition authorities
- Managerial failure
- Parts of processes might be contracted out, leaving smaller core business
- Firms may stay small to avoid attention of other firms e.g. takeover, predatory behaviour by other firms, limit pricing of other firms
- Small businesses must differentiate themselves, as they cannot usually compete on price.
Why do firms grow larger?
- Economies of scale
- decrease cost of production & sell more goods - more revenue (larger profit)
- large firms can usually charge lower prices - Hold greater market share
- allow them to influence prices & erect barriers to entry - Monopoly power
- often means firms have monopsony power
- can reduce costs by driving down prices of raw materials
- or can be natural monopoly e.g. train tracks or water company - Build up assets & cash
- more security, can be used in financial difficulties - Use retained profits to enter new markets, reduce impact of economic shock in one market.
- Diversify product portfolio, helping to spread risk across products.
- Managerial motives
- Owner’s ambition to own a large business or receive benefits that come with owning a large business e.g. larger salaries or increased leisure time. (bigger businesses can higher managerial directors)
Define firm
3.1.1
An organisation that brings together FoP and organises the production process, in order to produce output.
Define private sector
3.1.1.c
Made up of firms that are privately owned.
Part of the economy that is owned and run by individuals or groups of individuals, including sole traders & PLCs. Left to the free market.
Define public sector
3.1.1.c
Made up of state-owned organisations, including those that run central and local government activities and some enterprises in public ownership.
They act in society’s interest and do not face competition.
Losses made funded for by the taxpayer.
How can the private sector be split?
3.1.1.d
Into for-profit and not-for-profit organisations
Difference between profit organisations and not-for-profit organisations
3.1.1.d
Almost all of priv sector orgs are run to make a profit and to maximise the financial benefits for their shareholders.
Decisions can have negative impacts on society & are made in self-interest.
Organisations e.g. charities operate on a non-profit-making basis. Any profit made used to support their aim of maximising social welfare and helping individuals and groups
They are exempt from certain taxes that profit firms must pay,
Different forms firms can take
1.2.4
Sole proprietor - the owner of the firm also runs the firm e.g. small business (newsagents)
Partnership - profits and debts are shared between the partners in the business
Private/public joint-stock company - owned by shareholders.
Difference between private & public - shares of a public joint-stock company traded on the stock exchange, not the case for private.
How can businesses grow?
3.1.2
Internal
- Organic growth
External
- Forward & backward vertical integration
- Horizontal integration
- Conglomerate integration
Define organic growth
How do firms grow through organic growth?
3.1.2
When a firm grows internally by investing profits or borrowing from banks.
- Increase market share e.g. successful market campaign
- Diversify; develop new innovative products
- Find new markets to sell existing products
- Getting existing customers to buy more through advertising/investing in new technologies to expand production
Why could diversification be dangerous?
What can it depend on?
Why is diversification good?
3.1.2
Moving into a market in which the firm is inexperienced and existing rival firms already know the businesses.
May depend on quality of management team.
However, diversification reduces & helps spread risk across products
Advantages of organic growth
3.1.2
- Grow at a comfortable rate and maintain corporate culture.
- Maintain wealth of knowledge about your business
- Using retained profits mean low gearing & can give a strong financial position
- Stakeholders likely to be supportive
- Existing shareholders maintain control
Disadvantages of organic growth
3.1.2
- Slow
- Risk of over extending capacity of management team & key workers
- Larger competitors can crowd you out
- Relying on strength of the market to grow could limit growth
Options for organic growth and the effects
3.1.2
Grow customer base
- Increased sales
- Increase revenue
Reinvest profits into new assets and technologies - Improved productivity - Reduce costs per unit or - increase output - greater profits
Diversify
- spread risk
Develop new products through R&D
- Increase sales
- Increased revenue
Types of inorganic growth
3.1.2
External growth
- Merger (Amalgamation)
- Horizontal integration
- Vertical integration
- Conglomerate integration
- Takeover (Acquisition)
Define Merger
3.1.2
(Amalgamation)
A voluntary agreement between two companies to join together under a common board of directors.
Define Acquisition
3.1.2
(Takeover)
One firm buys over 50% of the shares of another firm.
Can be friendly or hostile.
Define horizontal merger (or acquisitions)
and horizontal integration
3.1.2
A merger between two firms at the same stage of production in the same industry.
e.g. Takeover of Rover by BMW in 1994
Horizontal integration is the result of a horizontal merger
Define vertical merger
3.1.2
A merger between two firms in the same industry, but at different stages of the production process.
Can be backward or forward integration.
Define forward
and backward integration
3.1.2
Forward; A process under which a firm merges with a firm that is involved in a later part of the production chain
Backward; a process by which a firm merges with a firm that is involved in an earlier part of the production chain.
- Allows more control/safeguarding of the supply chain.
e.g. Hotel Chocolat bought cocoa plantation in St Lucia
Define conglomerate merger
3.1.2
A merger between two firms operating in different markets and have unrelated business activities
e.g. Tata, Virgin, Unilever, Nestle, Sainsbury’s acquired Argos 2016.
Advantages of horizontal integration
3.1.2.b
- Fast growth
- greater economies of scale; reduce long-run average costs
- affects degree of market concentration; remove a competitor from market; increase market share/power
- growth in market business already understands
- increased barriers to entry, possible monopoly/monopsony behaviour
- Cost synergies by reducing duplication, decrease TFC (Assets) & TVC (employees) whilst increasing output
- Buy unique assets, patents, licenses
- Access to emerging markets with income elastic demand
Disadvantages of horizontal integration
3.1.2.b
- generally expensive & can lead to high gearing ratio
- diseconomies of scale; poor coordination/communication, demotivation due to redundancies (elimination of duplicate roles), corporate culture clash, differing business objectives
- For society there is reduced choice & job losses
Advantages of vertical integration
3.1.2.b
- allow rationalisation of the process of production
- companies that work on just-in-time basis have more confidence and improved reliability if the supplier is part of the firm; no longer rely on independent company
- less subject to interruptions in supply
- economies of scale
- buy unique assets, patents, licenses
- allows business to control distribution/supply chain resulting in reducing costs & improving quality
- better access to raw materials
- access to emerging markets with income elastic demand
- fewer cost synergies
