3.1.1-3.1.3 business growth

Question 1

reasons why firms grow

Answer 1

-owners desire to run a large business and continue to seek growth
-owners desire higher levels of profit
-desire for stronger market power
-desire to reduce average costs by benefiting from economies of scale
-growth provides opportunities for product diversification
-larger firms have easier access to finance

Question 2

reasons why small firms exist

Answer 2

-offer more personalized service focus on building relationships with customers
-unable to access finance to expand
-provide a product that is in a niche market
-operate in mass markets with low barriers to entry
-rapid growth can cause diseconomies of scale which are difficult to deal with many owners
- goal is not profit maximization

Question 3

what is a divorce of ownership and control meaning

Answer 3

separation between owners and managers who control the day to day running of the business

Question 4

what affect does divorce of ownership cause

Answer 4

gives a rise to the principal agent problem

Question 5

what is principle agent problem

Answer 5

a business owner hires a manager to perform tasks on their behalf, but the hired individual acts in their interests and not in the owner’s.

Question 6

the problem of principle agent is cause by

Answer 6

information gaps in that the agents have a lot more information than the owners

Question 7

one way principle agents problem is being able to diminish

Answer 7

grant share options to managers
managers as shareholders are able to align interests with the owners

Question 8

public sector

Answer 8

organisations owned and controlled by the government

Question 9

private sectors

Answer 9

organizations owned and controlled by private individuals

Question 10

what is the goal of public sectors

Answer 10

-not profit maximization goal but provide a service

examples
BBC and State schools, civil departments

Question 11

what is the goal of private sectors

Answer 11

goals is profit maximization
often more efficient with higher productivity

Question 12

types of ownership of private sectors

Answer 12

sole trader
partners
company shareholders

Question 13

what is a not for profit organisation operating in private sectors

Answer 13

-exists to provide a service/meet a need
-sell good/services and use profit to —generate to further their objectives
government exempt them from paying direct taxes

Question 14

all charaties are

Answer 14

not for profit organizations regulated by uk charity commissions

Question 15

how business grow

Answer 15

-organic
-forward and backward vertical integration
-horizontal integration
-conglomerate intergrations

Question 16

organic growth usually generated by

Answer 16

-gaining greater market share
-product diversification
-opening a new store
-international expansion
-investing in new technology

Question 17

types of inorganic growth

Answer 17

vertical integration
horizontal integration
conglomerate integration

Question 18

business growth can be

Answer 18

organic or external

Question 19

forward vertical integration involves

Answer 19

a merger/takeover with a firm further forward in the supply chain

Question 20

supply chain

Answer 20

supplier
manufacturer
distributor
retailer
end consumer

Question 21

backward vertical intergrations involves

Answer 21

a merger/takeover with a firm backward in the supply chain

Question 22

advantages of organic growth

Answer 22

-pace of growth is manageable
-less risky-growth is financed by profits-expertise in industry
-avoids diseconomies of scale
-management know and understand every part of business

Question 23

disadvantages of organic growth

Answer 23

-pace of growth can be slow/frustrating
-may not be able to benefit from economies of scale
-access to finance may be limited

Question 24

advantages of vertical integration

Answer 24

-reduces costs (middle party profit)
-lower costs make firms more competitive
-greater control over supply chain ,, less risk
-quality of raw materials controlled
-forward integration adds additional profit
-increases brand visibility

Question 25

disadvantages of vertical integration

Answer 25

-diseconomies of scale -culture clash between both firms that have merges -little expertise in running firm,, inefficiencies -price paid for new firm may take to recover

Question 26

horizontal integration advantages

Answer 26

-rapid increase of market share -economies of scale -reducing competition -existing knowledge of industry means more success -increase knowledge and expertise

Question 27

horizontal integration disadvantages

Answer 27

-diseconomies of scale -culture clash

Question 28

conglomerate advantages

Answer 28

-reduce overall risk of business failure -increased size and connections in industries/ inc app for growth -new business parts sold for profit

Question 29

conglomerate disadvantages

Answer 29

-lack of expertise in new industries -diseconomies of scale -job losses -worker dissatisfaction can lead to decreased productivity

Question 30

constrain from firms growing

Answer 30

-size of market -access to finance -owner objectives -regulation

Question 31

explain how this can cause constrain size of market access to finance owner objectives regulation

Answer 31

-niche markets smaller potential customers -smaller firms have harder time accessing loan as more risky -large firms have more constrains by regulations that aim to limit monopoly power

Question 32

demerger definition

Answer 32

firms sells off at least one of its businesses it owns or splits itself into separate parts too create two or more firms

Question 33

reasons for demerger

Answer 33

-reducing diseconomies of scale -increased business focus -cultural differences -remove loss making divisions -increased liquidity and dividend payments -comply with the demand of the competition commissions

Question 34

explain reducing diseconomies of scale

Answer 34

decreasing size of time can lower cost which increases profitability

Question 35

explain increased business focus

Answer 35

if business is larger efforts and focus and resources are scattered ,, hard to maintain and profitability ,, narrowing focus can increase profits

Question 36

explain cultural differences

Answer 36

some differences are irreconcilable ,, not worth the expense to change

Question 37

explain remove loss making divisions

Answer 37

more profitable to outsource

Question 38

explain increased liquidity and dividend payments

Answer 38

generate extra revenue for the firm in the year they occurred ,, increase profit and dividend payments

Question 39

explain comply with the demand of the competition commissions

Answer 39

some firms must demerge by competition regulators because of concern of high levels of market share

Question 40

impact of demerger on firms

Answer 40

- more focus on core business -removing loss making portions - increased efficiency and lower costs -increasing annual profits -removing difficult cultural differences

Question 41

impact of demerger on employees

Answer 41

-worker could lose job -reduced friction from cultural differences better team dynamics -smaller workforce higher chance of promotions -less complication in daily task because more narrow focus

Question 42

impact of demerger on consumer

Answer 42

-better quality of products and customer service -lower prices due to higher efficiencies -narrower product range - worse quality of product