Business growth Flashcards

Question

condition for normal profit

Answer 1

the money made from sales by a business Price x quantity

Answer 2

- total revenue / quantity (so price)

Answer 3

- change in total revenue / change in quantity

Answer 4

- many buyers and sellers - firms sell homogeneous goods - firms are price takers - they dont set price - no barriers to entry or exit - perfect information

Answer 5

- marginal revenue shows the additional revenue from selling one more u it - when MR = 0, total revenue is maximised since no extra revenue is gained from selling more - beyond MR = 0, TR is negative as more units are sold at lower price

Answer 6

- is business strategy where a company expands its operations by acquiring/controlling other businesses that are either upstream or downstream in the supply chain

Answer 7

forward - an integration of business that is closer to final consumers. eg shell buying first utility backward - business integration that is closer to the raw materials in the supply chain

Answer 8

🔗 1. Greater control over supply chain The firm integrates with a supplier (backward integration) or distributor/retailer (forward integration) → This ensures consistent input quality and delivery times → Reduces risk of supply disruptions or delays → Improves reliability and efficiency of production and sales 🔗 2. Lower transaction costs By internalising parts of the supply chain → The firm avoids repeated contracting, negotiation, and enforcement costs → Reduces dependency on external firms and potential exploitation → Leads to higher operational efficiency and cost savings in the long run 🔗 3. Improved profit margins Taking over suppliers or retailers allows the firm to capture more stages of value creation → Cuts out the profit margins that would go to third parties → Leads to lower average costs and/or higher profit margins per unit sold → Boosts overall profitability and competitiveness 🔗 4. Increased market power Controlling multiple stages of the supply chain → Increases barriers to entry for potential competitors → Enables the firm to exert greater influence over pricing and distribution → Enhances strategic control in the market, potentially leading to greater long-term survival

Answer 9

🔒 Reduced flexibility Vertical integration ties a firm to specific suppliers or distributors → This can reduce the ability to switch to more efficient or lower-cost partners → It limits responsiveness to market changes or innovations → Leading to potential inefficiencies and loss of competitiveness. 🧠 Managerial diseconomies Managing a larger, vertically integrated firm adds complexity → Coordination between different stages of production becomes harder → Communication breakdowns or control issues may occur → This reduces productive efficiency and can lead to higher costs. 💰 High setup and maintenance costs Acquiring and running additional stages of production requires significant capital investment → In the short run, this can strain finances or increase debt → If expected synergies don’t materialise, the return on investment may be low → Resulting in a negative impact on profitability. 🛍️ Loss of focus on core activities Diverting attention to manage new stages of production or distribution may dilute core strengths → Resources like capital, labour, and management time get spread thinly → This can harm product quality or brand image → Leading to long-term damage in competitive positioning. Regulatory Risks: Vertical integration can attract regulatory scrutiny, especially if it leads to anti-competitive practices or market dominance, which may result in legal challenges and fines.

Answer 10

joining/aquiring between two businesses in the same industry

Answer 11

Increased market share Horizontal integration involves merging with or acquiring firms in the same industry or market. This leads to a larger customer base and increased market share. With more market control, the firm can exert more influence over pricing and reduce competitive pressure. This results in potentially higher profits as the firm has a more dominant position in the market. Economies of scale Horizontal integration allows the firm to combine resources and reduce duplication of operations. This consolidation can lead to cost savings through economies of scale, such as bulk purchasing, sharing distribution networks, or consolidating management functions. With reduced average costs, the firm can potentially lower prices or increase profitability. These savings contribute to improved overall competitiveness and financial health. Reduced competition By acquiring or merging with competitors, horizontal integration reduces the number of firms in the industry. With fewer competitors, the firm can control more of the market, reducing price wars and competitive pressures. This allows the firm to focus on long-term strategy rather than constantly responding to competition. Reduced competition can lead to higher profit margins and increased pricing power. Diversification of products or services Horizontal integration often involves acquiring firms that offer complementary products or services within the same market. The firm can diversify its offerings, thereby attracting a wider range of customers and expanding its market reach. This diversification reduces reliance on a single product line, helping the firm manage risks associated with market fluctuations or changes in consumer preferences. Offering a broader range of products enhances the firm’s ability to cross-sell and increase sales.

Answer 12

📉 Increased Risk of Anti-Competitive Practices Horizontal integration involves merging with or acquiring competitors in the same industry ➡️ This can lead to a reduction in competition in the market, creating the potential for the monopoly power to increase ➡️ If the company gains too much control over the market, it could engage in price-fixing or restricting output, harming consumers ➡️ This could lead to regulatory scrutiny and potential legal challenges, increasing business risks 💼 Cultural Clashes and Integration Issues Merging with or acquiring another firm can bring together different corporate cultures ➡️ Employees from both companies may struggle to adapt to new management styles, leading to internal conflict or inefficiency ➡️ Disruptions in employee morale and organizational integration can result in lower productivity or higher turnover ➡️ In the long run, this can affect the company’s performance, negating the benefits of horizontal integration ⚖️ Reduced Focus and Increased Complexity Horizontal integration may lead to a broader product portfolio or entering new geographic markets ➡️ This increases the complexity of managing the business, requiring more resources for coordination and strategy ➡️ As a result, the firm may lose focus on its core competencies, leading to diluted brand identity or reduced quality ➡️ The larger and more complex the company, the harder it becomes to adapt quickly to changing market conditions, which may slow down decision-making processes 💸 High Costs of Acquisition Horizontal integration typically involves purchasing competitors, which requires a substantial financial investment ➡️ The company may take on debt or offer equity to finance the acquisition, which could strain its financial resources ➡️ If the expected synergies from the merger fail to materialize, the acquisition may lead to financial losses or lower returns on investment ➡️ The high initial costs can outweigh the long-term benefits, especially if the integration process is not smooth or if market conditions change ⚠️ Potential for Over-Capacity in the Market Horizontal integration might lead to over-consolidation in certain market segments, where fewer firms control a larger share of the market ➡️ This could result in redundant capacity or inefficiencies, as multiple firms may be offering very similar products or services ➡️ Overcapacity can lead to price wars or margin compression, reducing profitability ➡️ If the company cannot sustain its position or adjust to the new competitive dynamics, it might face declining revenues 🌍 Limited Geographic Diversification Horizontal integration often focuses on expanding within the same geographic area or similar markets ➡️ This limits the company's ability to diversify geographically, which means it remains vulnerable to local economic downturns or regional market saturation ➡️ If the market faces declining demand or intense competition, the company may struggle to achieve sustained growth ➡️ In contrast, vertical or conglomerate integration could offer broader diversification and help spread risks across different markets

Answer 13

Conglomerate integration is a type of merger or acquisition where two companies that operate in entirely different industries or markets come together.

Answer 14

Risk-Bearing Economies of Scale → Reduced Volatility → More Stable Revenue → Long-Term Growth A firm operating in multiple industries is less exposed to market-specific risks, meaning that downturns in one industry are offset by performance in others → This leads to more stable revenue streams, ensuring the company can maintain profitability even during economic downturns → The reduced financial risk allows the firm to take a long-term strategic approach, rather than making short-term survival decisions → Over time, this stability encourages investment in expansion, innovation, and workforce development, leading to sustained growth. 2. Increased Market Power → Reduced Dependence on a Single Market → Stronger Brand Recognition → Competitive Advantage Conglomerates operate across diverse markets, which reduces their reliance on a single sector or consumer base → By leveraging their brand presence in one industry, they can expand more easily into others, giving them a competitive edge over standalone firms → This increased brand recognition makes it easier for them to attract new customers and negotiate better deals with suppliers and distributors → Over time, reduced competition and increased brand loyalty lead to higher pricing power and greater profitability. 3. Cross-Industry Synergies → Cost Savings → Higher Efficiency → Improved Profit Margins Conglomerates can utilize shared resources such as marketing, distribution networks, and research and development (R&D) facilities across different industries → This results in economies of scope, meaning they can reduce costs per unit of output by spreading fixed costs across multiple business units → For example, a conglomerate with a strong logistics network in retail can use the same infrastructure for its manufacturing division, lowering transportation and storage costs → These cost savings translate to higher profit margins, allowing the company to reinvest in expansion and innovation. 4. Better Access to Finance → Stronger Creditworthiness → Easier Investment in Growth and Innovation Due to their diversified revenue streams, conglomerates appear less risky to banks and investors, as they are not reliant on a single market → This enhances their credit rating, making it easier to secure loans at lower interest rates or attract equity investment → With greater access to finance, conglomerates can fund large-scale research projects, acquire new firms, and expand into emerging markets → This ability to consistently reinvest in new technologies, production processes, and talent development ensures long-term competitive advantage.

Answer 15

Higher Risk of Failure - Diversifying into unrelated markets spreads resources thin and exposes the company to more risks. - If one sector faces a downturn, the firm’s overall profitability could be jeopardized, especially if the new venture requires significant capital. - This could lead to financial instability or insolvency, undermining the core business’s stability Managerial Complexity - Managing diverse operations across unrelated industries adds layers of complexity and increases administrative burdens. - A conglomerate operating in technology and retail might require vastly different strategies and expertise, leading to communication issues and delays in decision-making. - This could slow responses to market changes, decreasing competitiveness and profitability in each sector Diversification Dilution - Conglomerate integration involves entering unrelated markets, which can dilute the firm’s focus and expertise. - A manufacturing firm integrating with a financial services provider may lack the knowledge to operate efficiently in the new industry. The lack of synergy could lead to mismanagement and inefficiencies. - This increases operational costs and reduces profitability, potentially leading to losses in both the original and newly integrated markets. - general deos like communication -

Answer 16

Firms like Berkshire Hathaway operate across various industries, enhancing their reputation for stability and profitability. - Amazon - Meta

Answer 17

- when growth is internal - borrowing from banks rather than finance from a takeover - if the business has grown naturally, without a takeover

Answer 18

Niche Market Focus - A small business may cater to a specialized market with limited demand. Scaling up could lead to oversupply or dilution of the brand's value. - This allows the business to sustain profitability by serving a dedicated customer base that values exclusivity Avoiding Diseconomies of Scale - Expanding can increase complexity and costs, reducing efficiency. By remaining small, the business avoids issues like management difficulties or operational inefficiencies. - This ensures higher productivity and cost-effectiveness while maintaining quality standards. Regulatory and Tax Advantages - Small businesses may benefit from simplified tax regimes or exemptions from regulations that apply to larger firms. - This reduces administrative burden and operational costs, allowing the business to compete effectively. Limited Capital or Risk Aversion - Owners may lack the financial resources for growth or prefer to avoid the risks of borrowing or external investment. - The business can sustain itself within its financial means, minimizing the likelihood of insolvency. Customer Relationships and Loyalty - Small businesses often foster personalized interactions with customers, creating strong - This ensures a steady revenue stream and protects the business from competitive pressures

Answer 19

Remaining small: Niche market: Small firms may cater to specialized markets and not need to expand. Limited resources: Smaller firms often have fewer resources for growth. Risk aversion: Small firms may prefer to stay small to reduce business risks. Owner’s preference: Some owners may prefer managing a small operation for personal reasons (e.g., control). Growth: Economies of scale: Larger firms can lower their per-unit costs by producing at a larger scale. Market expansion: Growing firms may enter new markets or diversify their products to increase revenue. Access to more capital: Larger firms may have better access to finance for growth.

Answer 20

Private sector: Firms and organizations owned and operated by private individuals or companies. The primary goal is usually to maximize profit (e.g., retail businesses, tech companies). Public sector: Organizations owned and operated by the government or state, which often provide essential services and may not be profit-driven (e.g., NHS, public schools, government departments).

Answer 21

Profit organizations: Firms that aim to generate profit for their owners or shareholders. Examples include corporations and privately-owned businesses. Not-for-profit organizations: Organizations that aim to achieve social, cultural, or environmental objectives rather than to make a profit. Any surplus revenue is reinvested into the organization's mission (e.g., charities, NGOs, social enterprises).

Answer 22

Growth that occurs internally within the business, typically through increased sales, expansion of production, or entering new market

Answer 23

🌱 Less Risky Than External Growth 🔗 Organic growth happens through internal expansion (e.g., selling more products, opening new branches) rather than mergers or takeovers 🔗 This means firms grow at a manageable pace, maintaining control over their operations and culture 🔗 There's less risk of culture clashes, bad takeovers, or integration problems compared to external growth 🔗 As a result, organic growth is often safer and more sustainable for the business in the long term ✅ 🛡️ Maintains Firm’s Ownership and Control 🔗 Growing internally allows the original owners or managers to retain full control of the business 🔗 There’s no need to share ownership with other companies or new stakeholders, avoiding conflicts of interest 🔗 Decision-making remains quick, aligned with the firm's vision, and focused on long-term objectives 🔗 This helps the business stay true to its values and operate more independently 💸 Cheaper Than Mergers and Acquisitions 🔗 Organic growth usually involves reinvesting profits or using internal resources to expand 🔗 It avoids the high upfront costs of mergers (like legal fees, paying premiums, or restructuring costs) 🔗 With fewer financial risks, the firm can grow steadily without taking on large debts or risking overextension 🔗 This leads to healthier finances and stronger balance sheets over time 💵 🤝 Easier to Build Customer Loyalty 🔗 Organic growth tends to focus on improving existing products, building brand reputation, and developing relationships with customers 🔗 A steady approach allows the firm to listen to customer feedback and adapt products and services carefully 🔗 This can enhance customer loyalty as consumers associate the brand with consistency, reliability, and trust 🔗 Strong customer loyalty can create a competitive advantage that’s hard for rivals to replicate

Answer 24

🔄 Slow Growth Organic growth is typically slow and incremental ➡️ It relies on reinvesting profits and expanding at a steady pace ➡️ This can limit the firm’s ability to quickly gain market share in competitive industries ➡️ The process of expanding organically can take a long time, meaning the firm may be at a disadvantage compared to competitors using faster growth strategies (e.g., mergers or acquisitions) 💰 Limited Financial Resources Organic growth is constrained by internal financial resources ➡️ A firm must generate profits and reinvest them, which can limit the speed of expansion ➡️ If the firm faces low profitability or difficult market conditions, the pace of growth will slow ➡️ External funding options (e.g., loans, equity) may not always be viable or desirable for the firm 📉 Risk of Market Saturation Organic growth may lead to market saturation ➡️ As the firm grows, it may reach a point where further expansion in its current market becomes difficult ➡️ Without diversifying its product range or entering new markets, the firm may struggle to maintain high growth rates ➡️ A saturated market can lead to diminishing returns as competition increases and opportunities for growth decrease ⚡ Vulnerability to External Shocks Organic growth can leave firms vulnerable to external market shocks ➡️ If the firm is focused on slow and steady growth, it may lack the flexibility or resources to quickly adapt to sudden changes in the market ➡️ A recession, for example, could significantly slow down growth prospects if the firm has limited ability to diversify or adjust its operations ➡️ External shocks could affect the firm’s ability to grow and may lead to long-term setbacks 💼 Limited Market Power Organic growth may not allow firms to gain sufficient market power ➡️ Unlike firms that use acquisitions or mergers, firms that grow organically may struggle to outpace competitors or dominate markets ➡️ Limited scale can result in the firm having less influence over suppliers, customers, or pricing in the industry ➡️ Without significant market power, the firm may struggle to negotiate favorable terms or defend against aggressive competitors 🚶 Lack of Expertise Organic growth may limit access to external expertise ➡️ If a firm grows primarily through internal resources, it may miss opportunities to acquire skills or knowledge through external expertise gained in mergers or acquisitions ➡️ Organic growth doesn’t necessarily bring in new management talent, fresh perspectives, or technological innovations ➡️ This can lead to inefficiencies or a failure to innovate, especially in industries with rapidly changing technology or consumer preferences 🏢 Limited Diversification Organic growth can limit diversification of products and markets ➡️ The firm’s focus on growing its existing operations may reduce the ability to diversify into new products, services, or geographic areas ➡️ Lack of diversification increases the firm’s vulnerability to market fluctuations or industry-specific downturns ➡️ Firms that expand through acquisitions can achieve faster diversification, spreading risk and capitalizing on new opportunities 🏆 Strategic Limitations Firms may face limitations in reaching strategic goals with organic growth ➡️ Organic growth may not be sufficient to reach ambitious market share goals or achieve desired competitive advantages ➡️ If a firm’s strategy involves rapid expansion, organic growth may not be the best path to achieve those goals quickly ➡️ Firms seeking immediate impact or industry leadership may struggle with organic growth, which takes more time to materialize

Answer 25

Size of the market: The firm can only grow so much within a given market before it reaches its saturation point. Access to finance: Limited access to funding can constrain a firm's ability to expand or invest in new projects. Owner objectives: Owners may not want to expand aggressively due to personal preferences (e.g., maintaining control or avoiding risk). Regulation: Government rules, such as antitrust laws, environmental regulations, or industry-specific constraints, can limit the firm's growth opportunities.

Answer 26

1️⃣ Loss of Synergies → Costs May Outweigh Benefits → Lower Efficiency → Decision to Demerge Synergies from integration may no longer exist or may prove difficult to realise in practice. This could lead to higher-than-expected costs, poor integration, or conflicting management styles. As a result, firms may become less efficient or productive than they would be as separate entities. A demerger allows each part to operate independently and focus on its core operations. 2️⃣ Focus on Core Competencies → Increased Efficiency & Profitability → Better Strategic Direction By separating, each business unit can focus on its own strengths and objectives. This allows for more tailored strategies, better resource allocation, and a clearer mission. As each entity focuses on what it does best, efficiency and profitability can improve. 3️⃣ Unlock Shareholder Value → Higher Transparency → Investors Better Understand Each Business → Higher Valuations A large merged firm may be difficult to value accurately, especially if it operates in multiple unrelated industries. Demerging provides greater transparency and allows investors to assess each business separately. If the market values the parts higher than the whole, this can unlock shareholder value and increase overall investment appeal. 4️⃣ Regulatory Pressure or Antitrust Laws → Forced Separation → Increased Competition Regulators may require firms to break up if a merger has reduced market competition or created a monopoly. Demerging restores competitive conditions in the market, preventing abuse of market power. This ensures compliance with competition law and maintains fair pricing and innovation incentives. 5️⃣ Cultural or Operational Clashes → Reduced Productivity → Improved Performance as Separate Units Differences in corporate culture or management style post-merger can reduce cooperation and hinder decision-making. These internal inefficiencies can cause employee dissatisfaction and declining productivity. Demerging allows each unit to rebuild its internal processes, boosting morale and performance.

Answer 27

1. Niche Market Focus The firm specializes in unique or niche products/services with limited demand. Larger firms may not find it profitable to compete in this niche due to lower economies of scale. This allows the small firm to charge premium prices and maintain customer loyalty. Expanding could dilute the brand identity and reduce the firm's competitive advantage. 2. Lack of Economies of Scale Certain industries do not benefit much from large-scale production (e.g., artisanal goods, local services). Expanding production could lead to higher operational complexity and diseconomies of scale. Fixed costs may rise disproportionately, reducing profitability instead of increasing it. Staying small helps maintain cost efficiency and personalized service. 3. Barriers to Expansion Limited access to finance makes it difficult to fund expansion (e.g., lack of investor interest or high borrowing costs). Regulatory constraints such as strict licensing, zoning laws, or labor restrictions may prevent scaling up. Difficulties in hiring and managing a larger workforce might discourage growth. Increased competition from larger firms may make expansion unprofitable or risky. 4. Owner Preferences and Business Culture Some business owners prioritize work-life balance over growth and profitability. Expansion often means losing control of the business, which many entrepreneurs want to avoid. A small size allows for personal relationships with employees and customers, maintaining quality control. The firm may prefer to operate in a specific geographic area rather than compete nationally or internationally.

Answer 28

1. Economies of Scale As a firm expands production, average costs fall due to spreading fixed costs over higher output. This allows the firm to reduce prices, making it more competitive and increasing market share. Lower costs mean higher profit margins, which can be reinvested into further expansion. Continuous cost reductions create a barrier to entry for smaller firms, helping the firm maintain dominance. 2. Growth enables a firm to increase its market share, reducing competition and gaining pricing power. With fewer competitors, the firm can set higher prices and achieve supernormal profits. Stronger brand recognition makes consumers more likely to choose their products over smaller competitors. Greater market influence allows firms to negotiate better deals with suppliers, further reducing costs. 3. Expansion allows firms to operate in multiple markets, reducing reliance on a single product or sector. If one market declines, revenue from other business areas can compensate, making the firm more stable. Diversification into new product lines or geographic regions increases revenue streams. Large firms are better able to withstand economic downturns due to their diversified income sources. 4. Access to More Finance Larger firms have greater credibility and financial strength, making it easier to secure funding from banks or investors. They can raise capital through stock markets (IPOs) or issuing bonds, giving them a financial edge. Increased investment allows them to fund research & development, leading to innovation and competitive advantage. Strong financial backing enables firms to acquire smaller competitors, accelerating growth even further.

Answer 29

costa and coca cola - Pfizer selling their infant nutrition to nestle - walmart selling asda in 2020

Answer 30

when a firm decides to split into two or more separate firms - this can be done through the distribution of shares in the new companies to the existing shareholders of the parent company

Answer 31

the increased efficiencies in which firms gain as a result of integration

Answer 32

💡 1. Focus on core business A demerger allows a firm to separate non-core activities ➡️ Management can focus more closely on their main operations ➡️ Resources and attention are better allocated to profitable or strategic areas ➡️ This can improve efficiency and long-term profitability 📊 Improved efficiency Smaller, separated firms may operate with more flexibility and less bureaucracy ➡️ Decisions can be made faster and tailored to their specific market ➡️ This increases dynamic efficiency and responsiveness ➡️ Leading to better innovation or customer service 👁️ Greater transparency for shareholders A demerger often leads to clearer financial statements for each firm ➡️ Investors can better assess the performance of each business unit ➡️ This improves market valuation and can attract new investment ➡️ Encouraging accountability and better corporate governance 🛠️ Regulatory or legal benefits Sometimes firms demerge to avoid breaching competition rules ➡️ For example, if a merger led to dominance in a market ➡️ A demerger might prevent regulatory fines or forced breakups ➡️ Helping the firm stay compliant and maintain public trust 💰 May unlock shareholder value If one part of a business is undervalued within a large group, spinning it off can raise its profile ➡️ This can cause the share price to rise for both firms ➡️ Shareholders benefit from owning more focused and efficiently run companies ➡️ Making it a positive signal to financial markets

Answer 33

📉 Losses from High Fixed Costs 🔗 If a firm is consistently experiencing losses and its total revenue does not cover its fixed costs, it may decide to shut down 🔗 When fixed costs (e.g., rent, machinery, insurance) cannot be avoided in the short run and revenue is insufficient to cover even these costs, continuing operations may result in a larger financial loss 🔗 In such situations, the firm faces a decision: whether to shut down temporarily to avoid worsening its financial position or to continue operating at a loss 🔗 If losses persist and the firm cannot cover its variable costs or see a path to profitability, it may choose to shut down in order to stop incurring additional losses 🏚️💸 ⚖️ Inability to Cover Variable Costs 🔗 If a firm's revenue is not enough to cover its variable costs (e.g., wages, raw materials), it will likely choose to shut down in the short term 🔗 In the short run, if a firm cannot cover variable costs, it is better to cease production rather than continue operating and losing money on each unit produced 🔗 Shutting down allows the firm to avoid further losses, since continuing operations under these conditions only adds to the financial strain 🔗 As a result, firms that cannot generate enough revenue to cover their variable costs will likely shut down temporarily until they can recover financially or market conditions improve 🛑💵 📊 Decline in Demand 🔗 A significant drop in demand for a firm's products or services can lead to a decision to shut down if the firm cannot adjust quickly enough 🔗 If there is a sustained decrease in demand for the firm's product due to factors such as market saturation, changes in consumer preferences, or competition, revenue may fall below the break-even point 🔗 As sales continue to decline, the firm may realize it is unable to cover costs or even maintain its position in the market 🔗 In this case, shutting down may be the most viable option to avoid continuing to lose money in the long run 🛑📉 🏆 Increased Competition 🔗 Increased competition, particularly from low-cost or more efficient competitors, can drive firms out of business if they cannot keep up with market prices 🔗 If a firm is unable to match the costs or pricing strategies of its competitors, it may lose its competitive edge and experience falling profits 🔗 In highly competitive industries, firms that cannot offer lower prices or better products may find themselves with declining market share, leading to financial strain 🔗 If the firm is unable to adapt, it may decide to shut down due to the inability to compete effectively 🔄🏁 🛠️ Technological Obsolescence 🔗 Firms that fail to adapt to new technologies or innovations in their industry may find themselves at a competitive disadvantage, leading to a decline in profitability 🔗 When production processes become outdated or unable to keep pace with technological advancements, firms face higher costs or lower efficiency, impacting their ability to compete in the market 🔗 In industries where technological progress is rapid, companies that do not invest in innovation may be forced to shut down as they cannot maintain cost-effective operations or attract customers 🔗 As a result, firms that are unable or unwilling to adopt new technologies may shut down when they can no longer compete effectively in the market 💻🛑 🏛️ Regulatory or Legal Issues 🔗 Changes in regulations or legal restrictions can make it impossible for firms to continue operating if they are unable to comply or afford the costs of compliance 🔗 Increased taxes, environmental regulations, or licensing requirements can impose significant additional costs on firms, especially small businesses or those operating on thin margins 🔗 If the firm cannot afford to meet these new regulatory demands, it may be forced to shut down or risk legal penalties 🔗 Therefore, firms that face regulatory pressure and cannot adapt to new laws may choose to shut down to avoid further financial damage 🏛️📜 💳 Financial Insolvency 🔗 Firms that accumulate significant debt and cannot manage their financial obligations may reach a point of insolvency, where they are no longer able to pay creditors or sustain operations 🔗 When a firm is unable to secure additional funding, restructure its debt, or generate sufficient revenue to cover its liabilities, it may be forced to shut down or enter bankruptcy 🔗 Insolvency often results from a combination of poor financial management, external market factors, or the firm's inability to adjust to changing conditions 🔗 If the firm is unable to restructure its finances or secure necessary capital, it will likely be forced to shut down permanently 🏦🚫 💼 Lack of Profitability 🔗 The primary reason firms shut down is the lack of profitability over time 🔗 If a firm is consistently unable to generate profits, despite attempts to cut costs, increase prices, or improve efficiency, it may reach a point where continuing operations becomes unsustainable 🔗 When profits do not cover costs, and the firm cannot recover, shutting down becomes the only option to prevent continued losses 🔗 Therefore, firms that are unable to make a profit over an extended period of time may choose to shut down to stop the bleeding and avoid further financial harm 💔💰

Answer 34

⚖️ Depends on economies of scale Demergers may reduce economies of scale if firms were benefiting from bulk buying or shared overheads ➡️ This could increase average costs for the newly separated businesses ➡️ Especially in industries with high fixed costs like telecoms or transport ➡️ Therefore, cost savings from specialisation may be outweighed by efficiency losses 🧠 Depends on managerial ability The success of a demerger relies on the quality of management in the new firms ➡️ If leadership is inexperienced or weak post-demerger ➡️ The business may become less productive or directionless ➡️ So efficiency gains might not be realised without strong leadership 🏦 Depends on access to capital After a demerger, smaller firms may have less collateral and brand strength ➡️ Making it harder or more expensive to raise finance for investment ➡️ This could limit R&D or expansion plans ➡️ Which may reduce the potential benefits of increased focus 📉 Short-term disruption Demergers can cause organisational upheaval, legal costs, and confusion among staff and customers ➡️ Transition periods may reduce productivity and morale ➡️ Disruptions could outweigh benefits in the short run ➡️ Especially if the firms lack a clear strategic plan post-split 🧩 Depends on reason for demerger If the demerger is done for short-term shareholder pressure or image reasons ➡️ It may not lead to genuine long-term benefits ➡️ For instance, if it doesn’t solve core inefficiencies or poor demand ➡️ Then the structural change may just be superficial ⚠️ It depends on the scale of organisational restructuring Demergers often lead to overlapping roles being eliminated → This may result in redundancy payouts for workers who are no longer needed → These one-off costs can be substantial and reduce the financial benefits of the demerger in the short term → Therefore, the overall success of the demerger may depend on how well the firm manages this transition and whether long-term gains outweigh initial labour market frictions.

Answer 35

💼 Aligning Interests Stock options give managers the right to buy company shares at a set price → This creates an incentive for them to increase the firm’s share price → Because if the share price rises, they benefit financially → Therefore, managers are more likely to act in the best interest of shareholders (principals). 📈 Encouraging Long-Term Focus Managers only gain from stock options if the firm performs well over time → This encourages a focus on sustainable growth rather than short-term profits → Helps prevent risky or short-sighted decisions that harm long-term value → Therefore, long-term shareholder goals are more likely to be prioritised. 🧮 Performance-Based Reward Options are typically tied to performance targets (e.g. share price, revenue growth) → Managers must deliver results to benefit → This provides a clear incentive to improve efficiency and profitability → So, agent effort increases, reducing the mismatch between effort and reward. 🛠️ Reduced Need for Monitoring If managers’ goals align with owners’, costly monitoring and oversight can be reduced → This lowers agency costs and frees up resources → Managers self-motivate to hit targets instead of being externally policed → So, the principal-agent problem is addressed more efficiently.

Answer 36

🔄 Possibility 1: Allocative efficiency increases If the firm sets prices lower than profit-maximising levels (e.g., to boost sales, gain goodwill, or meet social goals) → The price could get closer to marginal cost (P → MC) → This would reduce deadweight loss and improve allocative efficiency → So allocative efficiency could improve if satisficing = lower prices. ❌ Possibility 2: Allocative efficiency decreases If the firm is satisficing by playing it safe, setting prices above MC to guarantee a safe profit → This would still lead to underproduction and underconsumption → Misallocation of resources persists → Allocative efficiency is not achieved. 🚀 Dynamic Efficiency Dynamic efficiency requires reinvestment in innovation, R&D, and tech → Profit satisficing limits surplus profits that could be reinvested → Firms may lack the incentive or funds for long-term innovation → Thus, dynamic efficiency is weakened. ⚙️ Productive Efficiency Productive efficiency means producing at the lowest average cost → Firms that are satisficing may not have strong incentives to minimise costs → Slack and waste may persist due to lack of cost-cutting pressure → Therefore, productive efficiency is not fully achieved.

Answer 37

🔁 Covering costs avoids shutdown in the short run At breakeven, total revenue = total costs → This means the firm is not making a profit but also not incurring a loss → As long as it covers all fixed and variable costs, the firm can sustain operations → This allows time to improve efficiency, adjust pricing, or wait for market conditions to improve. 📈 Opportunity for future profit Staying in the market at breakeven allows firms to maintain their presence and customer base → Demand or cost conditions might improve over time → This could move the firm into a profitable position without needing to re-enter the market → Exiting early may miss out on future economies of scale or new demand.

Business growth Flashcards

(64 cards)