Flashcards in Unit 3: Chapter 1 - The birth and growth of firms Deck (66)
What are ways in which you can measure the growth of a company?
Internet traffic, sales volume, market capitalisation, revenue, size of investments, profit, number of employees, number of markets operated in (product and geographic), market share, number of outlets and number of customers
What are the stages of a product?
Raw materials, manufacturers, retailers
What is horizontal integration?
Occurs when two business in the same industry merge, at the same stage of production
What is an example of horizontal integration?
Electricity distributer and gas distributer
What are the advantages of horizontal integration?
Eliminate competitors and gain market power, increases market share and pricing power; rationalisation - can eliminate duplications (may not need the same worker twice); synergies i.e. pooling resources can give a greater combined output; gain economies of scale as the size of the business increases, improved competitiveness and profits; create a wider range of products (diversification)
What are economies of scale?
When long run average cost (LRAC) falls as a firm increases its size output
What are the disadvantages of horizontal integration?
Gain diseconomies of scale; culture clash between the merged firms - can lose focus and productivity
What are diseconomies of scale?
LRAC rises as output increases
What is vertical integration?
The joining of two firms in the same industry but at different stages of production
What is an example of forwards vertical integration?
A car manufacturer purchasing a car dealership
What is backwards vertical integration?
Taking over a firm in a preceding stage of production
What is forwards vertical integration?
Taking over a firm in the next stage of production - gets closer to the consumer
What are the advantages of vertical integration?
Greater control of supply chains helps to reduce costs and improve quality of inputs; better control over retail distribution channels e.g. pub companies can ensure beers are sold in tenanted clubs; improved access to raw materials used in manufacturing
What are the advantages of backwards vertical integration?
Eliminate third party profit; gain control over a supplier - can guarantee the continued survival of the firm and can stop selling to rivals
What are the advantages of forward vertical integration?
Can guarantee a continued retailer of a product
What are the disadvantages of vertical integration?
Risk of entering an unknown market (operating outside core competence)
What is conglomerate integration?
The joining of two firms in completely unrelated markets - there is no link along the chain of production
What are the advantages of conglomerate integration?
Spread risks - use cross subsidisation; lowering risk by diversifying and smoothing out earnings
What are the disadvantages of conglomerate integration?
Risk of entering an unknown market - operating outside core competence
What is lateral integration?
Integration between firms that are in different but related industries
What are examples of lateral integration?
Google and Youtube; Skype and Ebay
What are demergers?
Firms that have previously merged split up into two different companies again
Why does a demerger occur in terms of lack of synergies?
This occurs when one part of a firm is having no beneficial impact in terms of its effect on the more efficient and profitable running of another part of the firm
Why does a demerger occur in terms of diseconomies of scale?
Management could struggle to run different parts of the firm with little in common
Why does a demerger occur in terms of price?
It is possible that the price of a demerged firm may be higher than that of a single bigger merged firm as a relatively inefficient part of one firm could drag down the share price of the whole company
Why does a demerger occur in terms of focused companies?
High profits might be obtained by increased knowledge and exploitation of a limited range of markets, big profits are more likely to be made if you are the market leader so it might be advantageous to divest (sell off) those bits of the company that don't fit in with the other core activities, those parts sold off could then become more successful than they were previously as management could now have time and expertise to nurture them
How can firms grow?
Selling more to their existing customers (market penetration) and selling to new customers in new markets: geographical and product (diversification)
What is internal growth?
Also known as organic growth, where the firm increases the sales and total revenue of its existing business
How can internal growth be achieved?
Increasing investment or taking on more workers as this leads to an expansion of output; ploughing profits back into the firm to increase capacity; borrowing money from banks (debt), issuing shares (equity); product development: increasing the product portfolio by selling new products or services to existing markets; diversification: selling new products or services to new markets