Topic 2.1 Flashcards
(39 cards)
Why do firms want to grow?
- Market power motive: higher marketshare -> dominance -> pricing power
- Cost motive: economies of scale can decrease costs helping to increase profit margins
Organic / internal growth
When a business expands on its own operations
Ways of organic growth
- Research and development: new and old products
- Entering new markets
Organic growth advantages
- Financed through internal funds -> no debt
- Existing strengths -> maintains culture
Organic growth disadvantages
- Slow growth -> takes longer time to return a return on investment
- Hard to build market share -> new market will have a leader
Inorganic / external growth
When a business merges with or takes over another business
Ways of inorganic growth
- Merger -> 2 businesses join together
- Takeover -> when one business buys the majority shares in another smaller business
Inorganic growth advantages
- Increased market share -> reduce competition, become dominant, set prices
- Economies of scales -> buy in bulk -> lower cost, higher profit
Inorganic growth disadvantages
- Clash of cultures ->businesses operate differently, demotivates staff, lower customer satisfaction
- Communication problems -> business gets bigger, too many employees, harder to control
Types of integration
Horizontal - merges with firm in same industry and at same stage of production
Forward vertical - merges with firm in same industry but at later stage of production
Types of integration
Backward vertical - merges with firm in sam industry but at earlier stage of production
Conglomerate - merges with a firm in an unrelates industry
Public limited company (PLC) advantages
- Limited liability -> owners cannot get sued, increase in demand for shares, increase the value of share price = more capital
- Stock market floatation -> able to raise capital easier without risk of debt
Sources of finance: internal
- Retained profit
PRO: no interest or debt
CON: once the money is gone, it is not available for future problems - Selling assets
PRO: no longer have to pay for maintenance
CON: might need the asset in the future
Sources of finance: external
- Loan capital
PRO: smaller regular repayments are made over time
CON: banks may also ask for collateral - Share capital
PRO: does not have to be paid and no interest
CON: dividends will need to be paid - Stock market
PRO: the business can also gain recognition
CON: losing control
Changes in aims and objectives:
As a business evolves
- Focus on survival or growth
- Enter or exit new market
- Change the size of workforce and product range
Changes in aims and objectives:
Internal reasons
- Factors the business can control e.g. business performance, change in management
Changes in aims and objectives:
External reasons
- Market conditions
- Technology
- Legislation
Common business objectives
- Survival
- Increasing market share
- Profit maximisation
- Cost efficiency
Globalisation
Businesses start operating on an international scale
Import
A product made overseas and brought into the UK
Products are imported because they cannot easily be manufactured or are cheaper overseas
Export
A product the UK sells to overseas markets
Offshoring
The relocation of business activities from the home country to an international one
Why offshoring?
- Cheaper labour
- Better technology
- More lenient legislation
Multinational
A business that operates in multiple countries
