3.1 Business Growth Flashcards
(20 cards)
What determines the size of firms? (7)
The size of firms can be determined by:
* Economies of scale relative to market size
* Diseconomies of scale
* Small firms as monopolists
* Profit motive
* Market power
* Diversification
* Owners’ objectives
These factors influence whether firms remain small or grow larger.
What are economies of scale?
Economies of scale refer to the cost advantages that firms experience as they increase their output.
Larger firms may experience diminishing returns on economies of scale relative to their size.
What is diseconomies of scale?
Diseconomies of scale occur when larger firms face increased costs due to factors like poor organization or inefficiency.
This can happen if a firm grows too quickly.
How can small firms hold monopoly power? (3)
- Providing personalized services
- Creating niche markets
- Having relatively price inelastic demand.
Examples include local shops that cater to specific community needs.
What is the profit motive in business growth?
The profit motive is the desire to earn higher profits, which encourages firms to grow and take advantage of economies of scale, provided they do not experience diseconomies of scale.
What is the principal-agent problem?
The principal-agent problem arises when agents (like managers) make decisions for principals (like shareholders) that may not align with the principals’ interests.
What is a public sector organization?
A public sector organization is controlled by the government and aims to provide services rather than maximize profits, such as the NHS.
What distinguishes private sector organizations from public sector organizations?
Private sector organizations operate in the free market and are profit-driven, while public sector organizations focus on social welfare and may not prioritize profit.
What is the main goal of a profit organization?
The main goal of a profit organization is to maximize financial benefit for its shareholders and owners.
What is organic growth?
Organic growth (or internal growth) occurs when firms expand their production, customer base, or product range without merging or acquiring other firms.
What are the advantages of organic growth? (3)
Advantages of organic growth include:
* Less risky than inorganic growth
* Sustainable using retained profits
* Existing shareholders retain control
However, it is slower and may limit the firm’s growth potential.
What is forward vertical integration?
Forward vertical integration occurs when a firm merges with or acquires another firm closer to the consumer, such as a coffee producer buying a café.
What are the advantages of vertical integration? (3)
Advantages of vertical integration include:
* Increased efficiency
* More control over market prices
* Greater certainty over production factors
However, it may lead to diseconomies of scale and barriers to entry.
What is horizontal integration?
Horizontal integration is the merger of two firms in the same industry and at the same stage of production.
What are the disadvantages of horizontal integration? (2)
- Potential disagreements in objectives
- Risk of monopoly power.
What is conglomerate integration?
Conglomerate integration is the combination of two firms with no common connection, such as a retail company merging with a food producer.
What are constraints on business growth? (4)
Constraints on business growth include:
* Size of the market
* Access to finance
* Owner objectives
* Regulation (red tape)
These factors can limit how much and how fast a firm can grow.
What is a demerger?
A demerger is when a large firm is separated into multiple smaller firms, often to focus on core activities or eliminate inefficiencies.
What are reasons for demergers? (5)
Reasons for demergers include:
* Lack of synergies
* Different growth rates
* Diseconomies of scale
* Focused companies
* Need for finance
These factors can motivate a firm to split into smaller, more focused entities.
What impact can demergers have on consumers? (2)
Demerger impacts on consumers can include:
* Lower prices due to reduced diseconomies of scale
* Increased choice if firms in the same industry separate.
