Business Growth Flashcards
(37 cards)
What is a Demerger?
A demerger is when a large firm is separated into multiple smaller firms, or it sells off at least one of the businesses it owns.
Reasons for demerger?
- reducing diseconomies of scale (firms may grow to large that average costs rise with output)
- increased business focus and control
- remove loss making portions/ divisions (may be more profitable)
- increase liquidity & dividend payments (generate extra revenue as firms may invest in more profitable parts of the firm)
- lack of synergy (synergy when the whole company is worth more than each company on its own - splitting can get greater profit)
- successful demerger - may lead to net welfare gain
What is dividend payments?
A dividend is the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors.
Negative Impact of demergers on businesses.
- makes it smaller meaning less control in market (reduces market share)
- less monopoly power
Impact of demergers on workers.
- senior managers may gain promotion (one firm senior financial direction) - smaller workforce provides more opportunity for promotion
- workers may lose jobs (structural unemployment)
Impact of demergers on consumers.
- may be short term problems - consumers may be confused betweeen the parent and demerger firm
- long term effects:
- removal of diseconomies of scale or if demerger is instigated by government it would lead to more competition and hence lower prices and more choice.
- successful demerger - net welfare gain ( w higher efficiency)
Why might the Gov require a demerger?
- the business is seen to be acting against the public interest
What are the two types of growth in businesses?
- internal growth (organic growth)
- external growth (inorganic growth)
What is internal/ organic growth?
Where the firm grows by increasing their output
Firms may:
- expanding production
- widening customer base (more choice)
- develop new product by diversifying their range
- investing in development/ research / tech/ production capacity
- may use market penetration to sell more
- increase labour
What is market penetration ?
A measure of how much a product/ service is being used by a customer compared to the total estimated market for that product or service
What is diversification?
Increasing range of products/ markets served by a business
What is market saturation?
It occurs when products/ services in a market are no longer in demand
- maybe cuz there is multiple offerings by competition
- less demand
What is external/ inorganic growth?
Inorganic growth occurs by merging/ taking over another firm.
Firms can merge in three different ways:
- vertical merger
- horizontal merger
- conglomerate merger
Describe the supply chain.
Supplier - manufacturer - distributor - retailer - end consumer
What is forward vertical integration.
- forward vertical integration Involves a merger/ takeover with a firm forward in the supply chain
E.g farmer merges with manufacturer
What is backward vertical integration?
Backward vertical integration involves a merger/ takeover with a firm further backward in the supply chain
E.g retailer takes over manufacture
What is horizontal integration?
This is the merger of two firms in the same industry and the same stage of production
E.g two manufactures merging with each other
What is conglomerate integration?
This is Combination of two firms with no common connection.
- not in the same stage of production or industry
What are the advantages of organic growth?
- low risk
- control of the firm remains unchanged
- firms can build on existing strengths and meet consumer expectations
- more job opportunities (increased scope for management roles)
Disadvantages of organic growth.
- may be too slow for directors who wish to maximise salaries
- people might be unaware of new ideas/ innovations/ unwilling to take new ideas (since its building on existing workers knowledge)
- access to finance may be limited
- diversifying range - may struggle w new ideas
What are the advantages of vertical integration
- firms can increase efficiency (gain economies of scale)
- firms can gain more control of the market/ supply chain
- firms could have more certainty over their production - own suppliers of components
What are the disadvantages of vertical integration.
- diseconomies of scale occur as costs increase
- little incentive to reduce their average costs when their market share is high
- such gains in the market share may attract the attention of the regulator
Advantages of horizontal integration
- provides instant access to increased economies of scale
- increase in market share leading to increased market power
- firms may gain new knowledge/ expertise
Disadvantages of horizontal integration.
- there could be disagreements in the objectives of the two firms which merged
- such gains in the market share may attract the attention of the regulator
- diseconomies of scale occur as costs increase
- little incentive to reduce their average costs when their market share is high
