3.1 Business Growth

3.1.1 Sizes and types of firms

What is the most obvious motive for business growth?

Profit motive

How are stocks valued?

Expectations of future sales and profits

What is another motivation beginning with C for business growth?

Cost motive

How does increasing size of business lower average costs?

Economies of Scale

What power do larger businesses have?

Market power

What are two ways an increased market share can increase profits?

• Increased brand recognition

• Reduced competition through barriers to entry as small firms cant match EoS

How might businesses grow to reduce investor risk?

Diversifying markets and products

Who’s objectives might cause a business to grow instead of maximising profit?

Managers

What is the acronym for why firms remain small?

LOS

What does the L stand for in LOS?

Lack of resources / Access to finance

What requires a high level of expertise when a business grows?

Higher levels of regulation including complex tax / accounting rules

How does access to finance deter business growth?

Hard to raise funds for expansion

What does the O stand for in LOS?

Owner Objectives

Why might owners of small businesses not want to expand?

Content with profits and do not want heavier responsibilities

What does the S stand for in LOS?

Small market size

Why do businesses with niche markets not want to expand?

Few customers so sales would stay the same

What is an example of a business like this?

Antiquarian Books

What is the problem that is sometimes referred to as the divorce of ownership and control?

The Principal - Agent problem

Who is the principle?

Owner (shareholders)

Who is the agent?

Manager who is trusted to run business on behalf of principle

What is the Principle - Agent Problem?

Management may run the businesses to maximise their own benefit instead of the shareholders

Why can senior managers pursue personal goals while satisfying shareholders?

Large organisations are complex and shareholders don’t have sufficient knowledge of their operations

What are 2 differences between private and public sector organisations?

• Public sectors owned by the state - Private sectors owned by individuals

• Public sectors aim to provide services - Private sectors aim to maximise profit

What private sector organisations have a different objective?

Non profit organisations

3.1.2 Business growth

What are the two types of business growth?

• Internal Growth

• External Growth

What are 2 examples of how internal growth can be achieved?

• Opening new branches

• New product development

What are two examples of external growth?

Mergers and takeovers

What objective may cause a business to contract?

Cost minimisation

What are the types of contraction?

Internal and external

What type of contraction would be selling off elements of the business?

External contraction

What is an example of internal contraction to improve organisational efficiency?

Delayering - removing unnecessary layers of management

What is organic (internal) growth?

When a business expands by ploughing profits back into the business or by taking out loans

What are 3 ways a business can grow organically?

• Increasing productive capacity through investment in new capital/ tech

• Development and launch of new products

• Growing a customer base through marketing

How did Aldi grow using an organic strategy?

Opened new branches using low costs to boost progits

How does facebook grow organically?

Increasing number of users to generate revenue

How does under armour use organic growth to grow 20% per year?

Expands product range and pushes into emerging markets

What is external growth?

Growth from mergers and takeovers

What is a merger?

When two previously separate business combine into a new business

What is a takeover?

Where one business acquires a controlling interest in another business (change of ownershi[)

What is the riskiest growth strategy?

Diversification - expanding into new markets with new products

How does amazon use external growth?

Takeovers of smaller businesses - twitch, audible, goodreads etc

Give 4 causes of mergers

• Need for economies of scale to remain price competitive

• Rapid technological change (creative destruction)

• Access to more distribution networks through other businesses

• Investment in faster growing emerging markets

What is the strategic motive behind acqusitions?

Improve and develop business that you just bought

What are the financial reasons for external growth in the form of acquisitions?

Makes best use of financial resources for shareholders - increased profits

What are 3 managerial motives for acquisitions?

• Personal ambition - takeovers attract media

• Fiancial reward - director gains from business growth

• Peer pressure - pressure to do takeovers if competitors are

What is backward vertical integration?

Acquiring a business operating earlier in the supply chain (e.g brewer buys a hop farm)

What is conglomerate integration?

A merger between firms that are involved in unrelated business activities

What is horizontal integration?

When companies from the same industry amalgamate (both at the same stage of production process)

What is forward vertical integration?

Acquiring a business further up the supply chain

What are two reasons for horizontal integration?

• To achieve economies of scale

• To increase market share

What are two other benefits of horizontal integration?

• Wider range of products

• Removes key rivals increasing long run pricing power

What is vertical integration?

Merger between firms at different stages of the production process within an industry

What are 3 reasons for vertical integration?

• To increase barriers to entry

• To increase control over suppliers

• To ensure a smooth production proces

What is another way vertical integration can give you an edge over competitors?

Removing suppliers helps make market less contestable

What is a merger between firms in entirely unrelated industries called?

Conglomerate integration

What are 3 benefits to conglomerate integration?

• Greater spread of risk

• Allows firms to use funds to cross subsidise investment in new areas

• Innovate risk free (still use revenue from other businesses)

What is a conglomerate?

A very large corporate with a large number of diversified businesses

What famous company is a conglomerate and how?

Samsung - electronics, military hardware and apartments

What are joint ventures?

When businesses join together to pursue a common project

What are 2 benefits of joint ventures?

• Shared costs and risks - innovation

• Benefit from collaboration to reach a mutually agreed target

What is a key contstraint on business growth for small businesses?

Finance - hard to access loans and too risky to raise equity in capital markets

What developments in society can reduce barriers to entry increasing competition?

Technological change - allows businesses to do same thing

What constraint significantly effects larger businesses?

Regulation to prevent monopolies