3.1 Business Growth

Question 1

What are the reasons as to why a firm may want to grow?

Answer 1

• Experience EofS; decrease AC
• Higher sales/revenue
• Greater market share; reach monopoly power; influence market; increase profit
• Build assets; build security to help in financial difficulties.
• Sell larger variety of products; less affected by changes to product

Question 2

Why may a firm choose to stay small?

Answer 2

No access to finance for expansion
Risk of failed investment
Focus on niche markets
- Small firms can specialise and provide unique products; builds loyal customer base
Prevents principle-agent problem
- Owners have some control over how firm operates; big firms can get complicated

Question 3

What is the principle agent problem?

Answer 3

When there is a divorce of objectives between ownership and control.

Question 4

What are the 2 differing aims of the owners and directors/managers?

Answer 4

Owners want to maximise return on investments; short run profit maximise
Directors/managers unlikely to want same thing; more to consider.

Question 5

Who has more control in principle-agent problem?

Answer 5

Managers/directors have more information of how firm works; able to control flow of the information; creates information gap for owners

Question 6

How could principal-agent problem be reduced?

Answer 6

Employees share ownership scheme
- Aligns interest of employees, managers and owners
Long term employment contracts for senior management
- Long term employees may take decision to benefit firm as whole instead of individual in long term
Long term stock commitment
- Senior management holding stocks incentivises management to make decisions to maintain profit & performance
Greater business Transparency with stockholders
- Better communication

Question 7

What is the public sector?

Answer 7

The public sector is the part of the economy that is owned and controlled by government.

Question 8

Why do countries decide to have a public sector?

Answer 8

To provide services; profit is not their aim.

Question 9

What is the private sector?

Answer 9

The private sector is the part of the economy that is owned and run by individuals e.g PLCs and sole traders.

Question 10

What are profit organisations?

Answer 10

Profit organisations are run to make profit and maximise financial benefits for shareholders.

Question 11

What are non-profit organisations?

Answer 11

Non-profit organisations aim to maximise social welfare and help individuals and groups. e.g charities

Question 12

What are the 2 types of business growth?

Answer 12

Organic growth and integration

Question 13

What is organic growth?

Answer 13

Economic growth is where a firm grows by increasing their output e.g more investment; more labour; new stores

Question 14

Advantages of organic growth

Answer 14

Sustainable development
- Expanding from internal resources and capabilities
Financially less risk
- Growth is financed by generated supernormal profits; allows firm to maintain financial stability and prevent excessive debt
Avoids DEoS
Good information
- Management understands the business; has more control

Question 15

Disadvantages of organic growth

Answer 15

Slow pace of growth
- Growth occurs gradually; disadvantage in competitive markets
Only occurs if supernoraml profit is made
- Organic growth relies on reinvested profits

Question 16

What is Vertical integration?

Answer 16

Vertical integration is strategy of expanding business operations across different stages of supply chain from production to distribution.

Question 17

What is forward vertical integration?

Answer 17

When a firm merges with a firm closer to the distribution.

Question 18

What is backward vertical integration?

Answer 18

When a firm merges with a firm closer to the supplier of raw materials.

Question 19

Advantages of vertical integration

Answer 19

Increased potential for profit
- Firm takes potential profit from larger part of supply chain
Costs savings
- Eliminates need for transactions between different stages of supply chain
Improved control
- Firm has more control of other stages of supply chain; efficient communication; better information
Access to information
- Less information gap

Question 20

Disadvantages of vertical integration

Answer 20

Increased costs
- Investment in other parts of supply chain; new facilities/tech/expertise.
Lack of expertise
- A firm may have less expertise managing another part of the supply chain; decreases efficiency

Question 21

What is horizontal integration?

Answer 21

Horizontal integration is when firms in the same industry at the same stage of production integrate.

Question 22

Advantages of horizontal integration

Answer 22

Increased Market share
- Firm increases market share by acquiring competitors
Reduced competition
- Less firm; companies have more control over market
Specialise
- More valuable expertise added to one firm; helps specialisation
Existing expertise
- Firms able to grow in an industry where expertise is present; likely to be more successful

Question 23

Disadvantages of horizontal integration

Answer 23

Reduced competition
- Reduced no of competitors; higher consumer price; reduced innovation
Regulatory issues
- If firm becomes too big (monopoly/oligopoly); regulation may intervene
Risk of failure
- Integration can face unexpected challenges; can result in losses and setbacks

Question 24

What is conglomerate integration?

Answer 24

Conglomerate integration is when a firm in different industries integrate.

Question 25

Advantages of conglomerate integration

Answer 25

**Reduced risk** - If one industry fails, firm can fall back onto other industry **Opportunity for growth** - Increased size and connections in new industries creates opportunities

Question 26

Disadvantage of conglomerate integration

Answer 26

**Lack of expertise** - New industry; new tech/products; less efficiency **Limited knowledge transfer** - New industry; less knowledge; more investment in training/skilled workers **Diseconomies of scale**

Question 27

What are the 4 constraints on business growth?

Answer 27

**Size of market** - If consumer market is low, firms cannot increase output; not enough consumers to buy supply **Access to finance** - Harder for smaller firms to get loans; perceived as *riskier than larger firms* **Owner objectives** - Owner may not want their business to grow further; happy with current profits **Regulation** - Large firms often constrained by regulation to limit monopoly power

Question 28

What is demerger?

Answer 28

Demerger is when a **firm sells off at least one of the business**; splits itself into separate parts to create 2+ firms.

Question 29

Reasons for demergers

Answer 29

**Reducing DEoS** - Decreasing size of firm to reduce costs/unit **Increased business focus** - Firm decides to narrow focus; easier/cheaper to maintain; more efficient **Increase liquidity** - Selling part of firm increases asset sales & increases share price **Remove loss-making parts** - Sell loss-making division to keep profits higher **Comply with regulation** - If firm is too big, regulation may force demerge

Question 30

Impacts of demerger on firm

Answer 30

**Narrow focus** - To increase efficiency and reduce costs; more innovation **Less principle agent problem** - More transparency between owners/management

Question 31

Impact of demerger on employees

Answer 31

**Promotions** - Separate firms need own managers and leaders; could lead to promotion **Job losses** - To make firm more cost efficient, jobs may be taken

Question 32

Impacts of demerger on consumers

Answer 32

**Lower prices/better quality** - Increased efficiency; lower prices; better quality Eval: Only if it is a successful demerge