Business Growth Flashcards
(20 cards)
Reasons why a firm chooses to stay small vs Reasons why a firm chooses to expand
Small:
- Constraints on growth
- Niche market/size
- Not all firms want to grow
- Owners objectives and regulation
- Access to finance
Grow:
- Monopoly power
- More profit
- Greater security
What is the principal agent problem?
When one group, the agent, acts on behalf of another group, the principal
Stakeholders have differing objectives:
Owners want to maximise the returns on their investment so will want to short run profit maximise
Directors and managers as Employees want to maximise their own benefits
Hence why firms tend not to operate to profit maximise but to profit satisfice
Distinction between private and public sector
Private sector is owned and run by individuals or a group of individuals, including sole traders and PLCs
Public sector is owned and controlled by local or central government
What is the private sector split into?
For-profit organisations
Not-for-profit organisations to maximise social welfare - money generated given to charities and smaller organisations
What are the two main types of growth?
Internal/organic growth
Integration
Advantages of organic/internal growth
The alternative integration is time-consuming, high risk, and expensive, with the long-term share price of the company falling after integration. Firms often pay too much for takeovers and key workers tend to leave after the integration
Firm is able to keep control of the business
Disadvantages of internal/organic growth
- unable to gain another firm’s market or asset though organic growth e.g. integration allows you to expand into Asian market to which you have no expertise in
- organic growth ma be too slow for directors who wish to maximise their salaries
- difficult for firms to get new ideas
What are the 3 ways integration growth works by?
- amalgamation
- merger
- takeover
amalgamation and merger- two firms join under common ownership
takeover - one firm buys another
Define vertical integration
Vertical integration is where two firms in the same industry join a different stages in the production process
If the merger takes the firm back to the supplier it is backwards integration
If the merger takes the firm to the eventual consumer of the good it is forward integration
Give an example of vertical integration
Tesco’s £3.7 billion takeover of Booker in 2018
Advantages of vertical integration
- increased potential profit - larger chain of production
- less risks - worry gone
- control quality of supplies and ensure delivery is reliable
- keeping costs low - don’t have to worry about being charged high prices for supplies
- secures retail outlets and can restrict these outlets from competitors
Disadvantages of vertical integration
Firm could have no expertise in the industry they took over
Define horizontal integration
Where two firms in the same industry at the same stage in the production process integrate
Advantages of horizontal integration
- reduced competition
- greater market share
- specialise and rationalise
- able to grow in market where it already has expertise
Disadvantage of horizontal integration
High risk as if the market fails the firm has nothing to fall back on as it has invested a lot
Define conglomerate integration
Where firms in different industries with no obvious connections integrate
They can sometimes be linked by common raw materials, technology, or outlets
Advantages of conglomerate integration
- diversify and spread risk if one area falls they have others to fall back on
- useful for firms where there is no room to grow in the present
- profit made from one firm can be invested into other products
Disadvantages of conglomerate integration
- no expertise
- workers on both sides so some may need to be made redundant
- perhaps different obejctives
Reasons for demergers
Demergers is breaking up a single business into 2 or more components, either to dissolve, sell, or operate on its own
- avoid compettion from competetive authority
- lack of synergies
- release money to pay off business loans or reinvest
- increase in share price, higher value of one part of the company as opposed to being ragged down
- failed merger
Impact of demergers of consumers, business’, and workers
workers either made redundant, loose morale, or promoted
business market value could increase or huge loss from selling it off, loss of economies of scale but reduction is diseconomies of scale
consumers - improved consumer choice, could suffer from higher prices
