3.1 Business Growth

Question 1

Reasons why firms grow?

Answer 1

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

Question 2

Reasons why small firms exist?

Answer 2

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

Question 3

What is the principle agent problem?

Answer 3

Occurs when one group makes decisions on behalf of another, often placing their prioritise above the other groups

Question 4

How can the principle agent problem be solved?

Answer 4

By granting share options to managers so their interests align with the businesses

Question 5

What is organic growth?

Answer 5

Growth usually generated by gaining market share, product diversification, open ending a new store, internal expansion

Question 6

What is Inorganic growth?

Answer 6

External growth that takes place by vertical integration, horizontal integration or conglomerate integration

Question 7

What is vertical integration?

Answer 7

When a firm takes over another firm in a different part of the supply chain

Question 8

What is horizontal integration?

Answer 8

When a firm takes over another at the same level in the supply chain

Question 9

What is conglomerate integration?

Answer 9

When a firm takes over another in a completely different industry

Question 10

What are the advantages of organic growth?

Answer 10

Pace is manageable, less risky, avoids DEos

Question 11

What are the disadvantages of organic growth?

Answer 11

Can be slow, May not benefit from EoS, Access to finance may be limited

Question 12

Advantages of vertical integration?

Answer 12

Reduces cost of production, make firm more competitive, reduces risk of raw materials, quality can be controlled

Question 13

Disadvantages of vertical integration?

Answer 13

DEoS, culture clash between firms, Possible little expertise in running the new firm

Question 14

Advantages of horizontal integration?

Answer 14

Rapid increase of market share, EoS, reduces competition, existing knowledge of industry

Question 15

Disadvantages of horizontal integration?

Answer 15

DEoS, culture clash

Question 16

Advantages of conglomerate integration?

Answer 16

Reduces risk of business failure, increases size and connections, part of new business may be sold for profit

Question 17

Disadvantages of conglomerate integration?

Answer 17

Lack of expertise, DEoS, job losses, worker dissatisfaction due to takeover

Question 18

Reasons for demergers?

Answer 18

Reduce DEoS, Increased business focus, cultural differences, removes loss making divisions, Increase liquidity , comply with the demands of the competitions commission