1 BUSINESS GROWTH MERGED

What are economies of scale?

Cost advantages that firms can acheive as they increase levels of output

Reasons firms tend to grow?

-economies of scale- can decrease their costs of production

• hold a greater share of the market- can influence prices and restrict other firms from entering market- get monopsony power
• more security - can build up assets and cash incase of financial difficulties - likely sell in more than one local/national market so less affected by changes in individual places or products

Reasons firms tend to remain small?

• gov regulation can hinder growth
  -managerial capacity- some entrepreneurs may lack skills or resources to manage effectively
• market demand/ limited size of market- if marked demand for product is limited- niche
  -access to capital/ funds- may have low availability of funds to finance purchase on new assets
• owner objectives- wants to retain control of business
• enables more focus/ improved customer service— gain loyalty from customers
• tax benefits
• regulation
• constraints to growth- unable to increase sales

Why business tend to remain small EVAL

• combination of factors
• discussion of weather it is their choice to remain small or constraints on growth
• staff shortages push up wages
• consumer confidence

What is the principal agent problem?

Interests of owner/ shareholder ( principal) and the manager( agent) of a firm do not align leading to conflicts

• manager may prioritise and seek to max own benefits rather than owners who want to max short run profit
  -e.g. ceo receives bonus even if company performance declines leading to shareholder losing value

How does this lead to a divorce of ownership and control?

When one group the agents make decisions on behalf of the principal- in theory should max benefits but in practice agents have temptation to max own benefits.- may not take big risks that could have big win for principal due to fear over job security

solutions to principal-agent problem

Performance based pay

What is the private sector?

Part of economy owned and run by individuals or groups of individuals- inc slow traders

What is the public sector?

Part of economy owned or controlled by local or central gov - purpose is to provide a service for UK citizens and profit making is not main aim

What is a private sector profit organisation?

Run to maximise the financial benefits for their shareholders- may not necessarily profit maximise

What are private sector non for profit?

Any profit they do make is used to support their aim to maximise social welfare and helping individuals and groups.

What is organic growth?

Firm grows by increasing their output e.g by investing or increasing labour- could be to open new shops or new range of products
Almost all growth in firms is organic
EXAMPLE- LEGO by introducing products like LEGO friends to expand consumer base

Advantages of organic growth

Low risk
Sustainable
Shareholders/firm retain control
Less expensive than integration

What is integration?

growth through amalgamation

What is vertical integration?

Integration of firms in the same industry but at different stages in the production progress

What is backwards integration?

If the merger takes the firm back towards a supplier of a good e.g. a retailer purchasing a farm

What is forward integration?

Company takes over business closer to consumer in supply chain e.g. buying manufacturer or retailer

What are the advantages of integration?

-Increased potential for a profit as the firm takes a greater share of chain of production

• suppliers less worried abt buyers not buying their goods vice versa
• backward integration businesses ensure quality and good delivery of goods

What are the disadvantages of integration?

Firms may have no expertise in the industry they took over
E.g. a car manufacturer would have little knowledge of actually selling cars

What is horizontal integration?

Firms in the same industry at the same stage of production integrate
E.g. 2015 atstraZeneca acquired ZA Pharma for 2.7 bn - gave them access to new compounds and was a long term deal to strengthen a specific sector of their business

Advantages of horizontal integration

• Reduce competition
  • increases market share
• Increase in market power
• Gain new ideas from the other business
• As its scale of operations is greater

Disadvantages of horizontal integration?

Increases risk for business if that particular market fails- nothing to fall back on

What is conglomerate integration?

A merger where firms in different industries with no obvious connections integrate - often linked by common raw materials/ tech/ outlets

Advantages of conglomerate integration

-useful for firms with no room for growth in present market

• range of products reduces risk if one industry fails
• easier for each individual part of business to expand as finance can be easily obtained and managers can be transferred from company to company within firms

Disadvantages of conglomerate integration?

• One business may take on another in a market they know nothing about

How is size of market a constraint to business growth?

Size of market always limited so not all businesses can mass produce and make profit
This can happen no matter how big market is as always limits to growth
Mostly in niche and luxury markets

How can access to finance be a constraint to
business growth?

If firms don't make enough profit or have to give out too much to shareholders they cant use RETAINED PROFITS to grow
Banks may be unwilling to lend firms money particularly small businesses as a LOAN is higher risk

How can owner objectives be a constraint to growth?

Some owners may not want their businesses to grow any further as they are happy with current profits and don't want the extra risk

How can regulation be a constraint to business growth?

Some markets may introduce regulations which prevent businesses from growing
E.g. uk gov regulates numb of pharmacies in local areas

What is a demerger?

A buisness stratergy where a single buisness is broken into two or more components

Real world example of demerger

1997: Pepsi announced demerger of its Pizza Hut

What are main reasons for demerger?

Lack of synergies
Value of separate parts of company/ share price
Company focus on individual markets

How is lack of synergies a reason for demergers?

Different parts of the company have no impact on each other so don't make each other more efficient. Managers are splitting their time between different areas leading to diseconomies of scale so a demerger avoids this.

How is value of the company/ market share a reason for demergers?

Value of separate parts of company more than the company combined . This is as some parts operate well and have potential to grow but overall business is brought down by lack of growth in other parts.
Financial markets talk about 'creating value' by splitting up companies like this.

How is focussed companies a reason for demergers?

Firms might want to concentrate on particular markets and products to become more efficient and successful

Impact of demerger on workers?

May gain or lose. The new separate firms may need new managers and leaders leading to promotion.
However the aim of increasing efficiency may result in job losses.

Impact of demergers on businesses?

Concentrating on smaller core business increases efficiency and increase innovation enabling survival in higher competition. But smaller size could cause loss of economies of scale and reduce efficiency.

Impact of demergers on consumers?

greater competition leads to lower prices