3.1 - Business Growth Flashcards
Why may an owner choose to keep his firm small
Reduces legal works
May be risk-adverse
May want a ‘lifestyle’ business
Explain the divorce of ownership from control
Managers run companies owned by shareholders. The managers may be focused on revenue maximising short term while the shareholders may want to aim for profit maximisation. This is the principle-agent problem
Pros and cons of organic growth compared to external growth
+ Less risky
- Slower to grow business
Difference between forward and backwards integration
Forwards- towards the consumer
Backwards- further up the supply chain
What is another term for horizontal integration
Merger
What is conglomerate integration
A merger between unrelated businesses
What are the constraints on business growth (4)
Size of the market (niche?)
Access to finance
Owner objectives
Regulation
Pros and cons of conglomerate integration
+ Reduced risk if a whole industry fails
+ Easier to expand sub-sections as finances can be pooled from elsewhere
+ Useful when there is no more room for growth in a market
- Lack of expertise can be damaging
Pros and cons of organic growth
+ Reduces administrative costs
+ Less risk
+ Firms build upon their own strengths
+ Existing shareholders retain control over the firm
- Lack of expertise when moving into new markets
- Slow growth
Reasons for demergers
Diseconomies of scale
Antitrust from government
Failed mergers
Underperforming sectors
Investment or debt
Why may investment or debt cause demergers
A firm may sell off one of its divisions to pay off business debts or to undertake a major investment programme
Explain Dunbar’s number
Dunbar’s number states that people can operate in groups of up to 150 while maintaining strong social relations with all other members
