business objectives + size of business

organic growth

Refers to a type of growth internally, without a merger/acquisition

Can be expansion of a firms operations, entering new markets, or opening new stores

merger

Joining of two or more firms to form one organisation

demerger

separation of one business into two or more independent businesses/this would apply in the case of the dissolution of a previous merger

takeover

the acquisition of one business by another. A takeover is an example of inorganic growth. Can be friendly or hostile

horizontal integration

When one firm merges with another firm in the SAME INDUSTRY at the SAME STAGE OF PRODUCTION

vertical integration

when one firm merges with another firm in the SAME INDUSTRY but at a DIFFERENT STAGE OF PRODUCTION.

This can be forward or backward

conglomerate integration

merging of two firms with no common interest or in completely unrelated industries

economies of scale

When long-run average costs fall as output increases

diseconomies of scale

Rising long-run average costs as the scale of production increases.

minimum efficient scale

The lowest output at which minimum long-run average cost is achieved.

profit maximisation

Producing where MC = MR, with MC crossing MR from below. Maximises the difference between TR and TC.

revenue maximisation

Producing where MR = 0, at the maximum of TR.

sales volume maximisation

Maximising quantity sold, commonly subject to making at least normal profit: the highest output where AR = AC.

profit satisficing

Earning an acceptable level of profit while pursuing other objectives.

Divorce of ownership from control

occurs when there is a separation

of ownership and control in a company

principal agent problem

asymmetric information

When the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal

example: Owners’ main aim is to increase profits so that a high dividend is paid to shareholders but Managers’ aim is to increase their salaries which would reduce the amount left from profits to be distributed as dividends.

This causes firms to move away from profit maximising goal to other goals such as sales revenue maximisation or sales volume maximisation

why businesses want growth

• economies of scale and competitiveness

Greater output

→ fixed costs spread over more units and greater scope for specialisation

→ average costs fall

→ profit margins increase at an unchanged price

→ retained profits can finance further investment.

Alternatively:

Lower average costs

→ ability to reduce prices while remaining profitable

→ increased competitiveness

→ higher sales and market share.

evaluation:

Growth beyond the efficient scale

→ communication and coordination become harder

→ mistakes, delays and managerial costs rise

→ diseconomies of scale may outweigh savings.

Also, growth in revenue or asset ownership does not automatically generate economies of scale: operations must actually be integrated or capacity used more effectively.

Diagram: LRAC, showing output rising and average cost falling along its downward-sloping section.

• higher revenue and access to new markets

Expansion into new geographical or product markets

→ access to additional customers

→ higher potential sales revenue

→ if additional revenue exceeds additional costs, total profit increases

→ higher potential dividends and business value.

Evaluation:

Different tastes, languages or distribution arrangements

→ existing products may require adaptation and additional marketing

→ costs rise

→ expected sales may not materialise

→ expansion may reduce profits.

• greater market power

Growth increases the firm’s market share

→ it may gain stronger brand recognition and bargaining power

→ customers or suppliers have fewer attractive alternatives

→ firm may obtain higher selling prices or lower input prices

→ profit margins increase.

Evaluation:

Market share alone does not guarantee pricing power

→ imports, substitutes and potential entry can constrain prices

→ customers may switch if prices rise

→ increased size may not increase profitability.

• diversification reduces risk

Expansion into different products or geographical markets

→ revenue depends on several sources

→ weak demand in one market may be offset by stronger demand elsewhere

→ total profits become more stable

→ lower risk of financial difficulty.

Evaluation:

Markets may be exposed to the same downturn

→ revenues fall together

→ diversification offers limited protection.

why choose growth by merger or takeover

• Rapid access to established customers and operations

Acquire an existing business

→ obtain its customers, staff, distribution network and productive assets

→ avoid building these from the beginning

→ enter a market more quickly

→ earn revenue sooner than through organic growth.

Evaluation: acquisition price

Buyer pays a substantial premium for expected future benefits

→ financing costs or opportunity costs rise

→ future additional profits may be insufficient to justify the purchase

→ rapid growth destroys rather than creates shareholder value

• synergy and complementary expertise

Businesses combine different but complementary capabilities

→ share technology, knowledge and distribution

→ develop better products or deliver existing services more efficiently

→ demand rises and/or costs fall

→ combined profit may exceed what the firms could earn separately.

Evaluation: integration difficulties

Different cultures, systems or working practices

→ disagreements and disruption

→ delayed product development and higher integration costs

→ expected synergies fail to materialise.

Key employees may leave

→ specialist knowledge is lost

→ the value of the acquisition falls.

• Cost savings and removal of duplication

Combined business shares administration, marketing, logistics or research

→ duplicated expenditure can be reduced

→ average costs fall

→ profit margins rise.

Evaluation:

Some functions cannot be combined easily

→ different systems or local requirements must be maintained

→ savings are smaller than expected.

Redundancy payments, retraining and system conversion create immediate costs, while benefits may take years.

• consumer benefits

Lower prices:

Cost savings

→ firm can reduce prices while maintaining profit margins

→ consumers can afford more

→ consumer surplus increases.

Evaluation: Savings may be retained as higher profits if competitive pressure is weak.

Improved quality:

Shared finance and expertise

→ investment in product development and quality control

→ more reliable or attractive products

→ consumer welfare rises.

Evaluation: Integration problems or aggressive cost-cutting may reduce quality.

Greater availability:

Acquirer’s distribution network used for the acquired product

→ products reach more stores or locations

→ greater convenience and access for consumers.

Evaluation: Rationalisation may remove less profitable products or stores, reducing choice for some customers.

consumer benefits for mergers/takeovers

Lower prices:

Cost savings

→ firm can reduce prices while maintaining profit margins

→ consumers can afford more

→ consumer surplus increases.

Evaluation: Savings may be retained as higher profits if competitive pressure is weak.

Improved quality:

Shared finance and expertise

→ investment in product development and quality control

→ more reliable or attractive products

→ consumer welfare rises.

Evaluation: Integration problems or aggressive cost-cutting may reduce quality.

Greater availability:

Acquirer’s distribution network used for the acquired product

→ products reach more stores or locations

→ greater convenience and access for consumers.

Evaluation: Rationalisation may remove less profitable products or stores, reducing choice for some customers.

benefits of mergers/takeovers: Stronger products and opportunities to sell complementary services

Combined firm offers complementary products

→ customers can purchase a wider package from one provider

→ convenience increases and marketing reaches existing customers

→ sales per customer may rise

→ higher revenue.

Evaluation:

Customers may prefer to compare and buy components separately

→ packages do not guarantee higher demand.

Poor performance in one component can also damage the reputation of the whole package.

benefits of mergers/takeovers: Cost savings and removal of duplication

Combined business shares administration, marketing, logistics or research

→ duplicated expenditure can be reduced

→ average costs fall

→ profit margins rise.

Evaluation:

Some functions cannot be combined easily

→ different systems or local requirements must be maintained

→ savings are smaller than expected.

Redundancy payments, retraining and system conversion create immediate costs, while benefits may take years.

benefits of mergers/takeovers: Synergies and complementary expertise

Businesses combine different but complementary capabilities

→ share technology, knowledge and distribution

→ develop better products or deliver existing services more efficiently

→ demand rises and/or costs fall

→ combined profit may exceed what the firms could earn separately.

Evaluation: integration difficulties

Different cultures, systems or working practices

→ disagreements and disruption

→ delayed product development and higher integration costs

→ expected synergies fail to materialise.

Key employees may leave

→ specialist knowledge is lost

→ the value of the acquisition falls.

benefits of mergers/takeovers: Rapid access to established customers and operations

Acquire an existing business

→ obtain its customers, staff, distribution network and productive assets

→ avoid building these from the beginning

→ enter a market more quickly

→ earn revenue sooner than through organic growth.

Evaluation: acquisition price

Buyer pays a substantial premium for expected future benefits

→ financing costs or opportunity costs rise

→ future additional profits may be insufficient to justify the purchase

→ rapid growth destroys rather than creates shareholder value.

benefits of organic growth

• Expansion builds on existing expertise

Firm opens additional stores using a familiar business model

→ managers apply established knowledge of sourcing, staffing and operations

→ fewer unfamiliar activities need to be managed

→ expansion may be less risky

→ stronger chance of profitable growth.

New locations may have different demand or stronger competition

→ past success may not transfer

→ new stores may generate insufficient revenue.

• Greater control over the pace of growth and corporate culture

Firm recruits and trains staff within its own systems

→ working practices remain more consistent

→ fewer culture clashes than combining existing organisations

→ coordination and service standards may be easier to maintain.

Gradual expansion

→ management can identify problems before expanding further

→ risk of organisational overstretch is reduced.

Evaluation:

Rapid organic growth can still stretch management and logistics

→ service problems and rising costs

→ diseconomies of scale.

Organic growth is not automatically slow or manageable.

• Avoids acquisition premiums and integration costs

Firm develops its own capacity

→ does not pay to acquire another company’s goodwill or control

→ avoids some merger-related legal, advisory and integration costs

→ potentially better returns on investment.

Evaluation:

Building premises, recruiting staff and establishing customers are expensive

→ organic growth still requires substantial finance

→ it may take longer to generate returns.

Additional evaluation: speed

Organic growth is relatively slow

→ rivals may secure locations or customers first

→ market-share opportunities are lost.

benefits of organic growth - Expansion builds on existing expertise

Firm opens additional stores using a familiar business model

→ managers apply established knowledge of sourcing, staffing and operations

→ fewer unfamiliar activities need to be managed

→ expansion may be less risky

→ stronger chance of profitable growth.

Evaluation:

New locations may have different demand or stronger competition

→ past success may not transfer

→ new stores may generate insufficient revenue.

benefits of organic growth - Greater control over the pace of growth and corporate culture

Firm recruits and trains staff within its own systems

→ working practices remain more consistent

→ fewer culture clashes than combining existing organisations

→ coordination and service standards may be easier to maintain.

Gradual expansion

→ management can identify problems before expanding further

→ risk of organisational overstretch is reduced.

Evaluation:

Rapid organic growth can still stretch management and logistics

→ service problems and rising costs

→ diseconomies of scale.

Organic growth is not automatically slow or manageable.

benefits of organic growth -Avoids acquisition premiums and integration costs

Firm develops its own capacity

→ does not pay to acquire another company’s goodwill or control

→ avoids some merger-related legal, advisory and integration costs

→ potentially better returns on investment.

Evaluation:

Building premises, recruiting staff and establishing customers are expensive

→ organic growth still requires substantial finance

→ it may take longer to generate returns.

Additional evaluation: speed

Organic growth is relatively slow

→ rivals may secure locations or customers first

→ market-share opportunities are lost.

Diagram: Falling LRAC from increased scale, paired with evaluation about eventual diseconomies.

benefits of demergers

• Greater managerial focus

Diverse business contains divisions with different customers, technologies and objectives

→ senior management must divide attention across unrelated activities

→ some decisions lack specialist understanding.

Demerger

→ each management team concentrates on its own market

→ clearer objectives and faster, better-informed decisions

→ productivity and profitability may improve.

Evaluation:

If divisions already operated independently

→ separation changes little about everyday management

→ improvements may be small relative to separation costs.

• Reduced diseconomies of scale

Large, complex business has many layers of management

→ slow communication and unclear responsibility

→ errors, delays and higher costs.

Demerger simplifies the organisation

→ decisions are made closer to operations

→ communication and accountability improve

→ average costs may fall

→ profit margins rise.

Evaluation: loss of economies of scale

Separate firms duplicate administration and lose bulk-buying advantages

→ average costs rise

→ these increases may outweigh savings from simpler management.

• More focused investment and clearer valuation

Divisions compete internally for finance

→ promising projects may be underfunded.

Separation

→ each business has clearer accounts and its own investment strategy

→ investors can assess and fund it separately

→ better allocation of finance

→ potential growth and higher shareholder value.

Evaluation:

A weaker division loses financial support from a stronger division

→ borrowing may become harder or more expensive

→ investment and survival prospects deteriorate.

benefits of demergers: Greater managerial focus

Diverse business contains divisions with different customers, technologies and objectives

→ senior management must divide attention across unrelated activities

→ some decisions lack specialist understanding.

Demerger

→ each management team concentrates on its own market

→ clearer objectives and faster, better-informed decisions

→ productivity and profitability may improve.

Evaluation:

If divisions already operated independently

→ separation changes little about everyday management

→ improvements may be small relative to separation costs.

benefits of demergers: Reduced diseconomies of scale

Large, complex business has many layers of management

→ slow communication and unclear responsibility

→ errors, delays and higher costs.

Demerger simplifies the organisation

→ decisions are made closer to operations

→ communication and accountability improve

→ average costs may fall

→ profit margins rise.

Evaluation: loss of economies of scale

Separate firms duplicate administration and lose bulk-buying advantages

→ average costs rise

→ these increases may outweigh savings from simpler management.

benefits of demergers: More focused investment and clearer valuation

Divisions compete internally for finance

→ promising projects may be underfunded.

Separation

→ each business has clearer accounts and its own investment strategy

→ investors can assess and fund it separately

→ better allocation of finance

→ potential growth and higher shareholder value.

Evaluation:

A weaker division loses financial support from a stronger division

→ borrowing may become harder or more expensive

→ investment and survival prospects deteriorate.

workforce benefits of demergers

• Clearer roles and greater responsibility:

Smaller independent business

→ employees understand how their work contributes to objectives

→ managers can give more direct feedback and responsibility

→ motivation and productivity may improve.

• Career opportunities:

New independent firms require their own leadership and specialist functions

→ new senior roles and promotion opportunities

→ employees may develop additional skills.

• job security:

Better focus and lower costs improve competitiveness

→ business becomes more financially sustainable

→ long-run employment may become more secure.

Evaluation:

Restructuring creates uncertainty

→ morale falls or skilled workers leave

→ productivity suffers.

Cost-cutting may also cause redundancies, while the loss of group resources may reduce training, benefits or opportunities to move between divisions.

why some firms remain small

• low minimum efficient scale

Limited opportunities for economies of scale → minimum long-run average cost is reached at relatively low output → small firms can compete on costs → little cost-based incentive to expand.

Evaluation: A low MES allows firms to remain small but does not force them to. They may still expand to increase total profits or reach new customers.

• Personal service and niche markets

Small firm develops close customer relationships and specialist knowledge

→ offers flexible, customised services

→ customers value quality and trust over the lowest price

→ firm can charge enough to cover its costs

→ survives alongside larger competitors.

Reputation takes time to establish, and demand may be limited

→ a downturn or the loss of a few customers can threaten survival.

• Small or local market

  Demand exists within a limited geographical area or specialist segment

  → expansion would exceed available demand

  → additional capacity would be underused

  → average costs could rise

  → remaining small is commercially rational.

  Evaluation: Online marketing or serving a wider area may expand demand, although transport and supervision costs may also increase.

• Financial constraints

  Small firms have limited retained profits and collateral

  → lenders perceive greater risk

  → borrowing is expensive or unavailable

  → investment in equipment, staff and larger contracts is restricted

  → firm remains small despite wanting to grow.

  Evaluation: A strong record, outside investment or improved retained profits may remove this constraint over time.

• Owner objectives and control

  Owner values independence, manageable hours or close supervision

  → growth would require delegation, borrowing or outside investors

  → control falls and workload or risk may rise

  → owner chooses satisfactory profit over expansion.

  Evaluation: Owner objectives can change as opportunities, family circumstances or succession plans change.

why some firms remain small: Low minimum efficient scale

Limited opportunities for economies of scale → minimum long-run average cost is reached at relatively low output → small firms can compete on costs → little cost-based incentive to expand.

Evaluation: A low MES allows firms to remain small but does not force them to. They may still expand to increase total profits or reach new customers.

why some firms remain small:Personal service and niche markets

Small firm develops close customer relationships and specialist knowledge

→ offers flexible, customised services

→ customers value quality and trust over the lowest price

→ firm can charge enough to cover its costs

→ survives alongside larger competitors.

Evaluation:

Reputation takes time to establish, and demand may be limited

→ a downturn or the loss of a few customers can threaten survival.

why some firms remain small:Small or local market

Demand exists within a limited geographical area or specialist segment

→ expansion would exceed available demand

→ additional capacity would be underused

→ average costs could rise

→ remaining small is commercially rational.

Evaluation: Online marketing or serving a wider area may expand demand, although transport and supervision costs may also increase.

why some firms remain small:financial constraints

Small firms have limited retained profits and collateral

→ lenders perceive greater risk

→ borrowing is expensive or unavailable

→ investment in equipment, staff and larger contracts is restricted

→ firm remains small despite wanting to grow.

Evaluation: A strong record, outside investment or improved retained profits may remove this constraint over time.

why some firms remain small: Owner objectives and control

Owner values independence, manageable hours or close supervision

→ growth would require delegation, borrowing or outside investors

→ control falls and workload or risk may rise

→ owner chooses satisfactory profit over expansion.

Evaluation: Owner objectives can change as opportunities, family circumstances or succession plans change.

business objectives: profit maximisation advantages and disadvantages

Advantages:

MC = MR

→ difference between total revenue and total cost is maximised

→ greatest available current profit, given demand and costs

→ potential for higher dividends and retained investment finance

→ supports shareholder returns.

Evaluation:

Demand and costs are uncertain

→ managers may not know the exact profit-maximising output.

Also:

Excessive focus on immediate profit

→ cuts to training, quality or R&D

→ weakens future competitiveness

→ lower long-run profit.

Crucial distinction: Long-run profit maximisation can justify lower current profit. It is not necessarily short-term thinking.

business objectives: revenue maximisation advantages and disadvantages

• Larger customer base

Firm expands output beyond the profit-maximising level towards MR = 0

→ usually lowers price to sell additional units

→ attracts more customers

→ greater awareness and repeat purchasing

→ potential future revenue and profit growth.

Evaluation:

Customers may only be attracted by low prices

→ leave when prices rise

→ a larger customer base may not generate sustainable profits.

• Economies of scale

Higher output

→ fixed costs spread over more units and potential specialisation

→ average costs may fall

→ improved future competitiveness.

Evaluation:

The firm may already be beyond MES

→ extra output raises average costs

→ growth worsens efficiency.

• Market position

Higher sales

→ stronger presence and distribution

→ may help the business establish itself against incumbents

→ growth supports long-run survival.

Evaluation: profit sacrifice

Between profit-maximising and revenue-maximising output, normally MC > MR

→ each additional unit adds more cost than revenue

→ total profit falls

→ less retained finance and lower shareholder returns.

Revenue maximisation may even create losses if price is below AC.

business objectives: sales volume maximisation advantages and disadvantages

Lower prices and greater output

→ more units sold and potentially larger market share

→ greater customer awareness and possible economies of scale

→ stronger future market position.

Under the usual no-loss constraint:

Firm expands to the highest output where AR = AC

→ earns normal profit

→ sacrifices supernormal profit to maximise sales volume.

Evaluation:

Little financial surplus

→ reduced ability to absorb shocks or fund risky investment

→ shareholder dissatisfaction and financial vulnerability.

It may also push output beyond the revenue-maximising level, where MR is negative.

business objectives: profit satisficing advantages and disadvantages

Business earns an acceptable profit

→ managers can pursue service quality, employee welfare, growth or personal objectives

→ may improve motivation, customer loyalty or long-term stability.

Evaluation:

Weak performance targets

→ managerial slack and unnecessary costs

→ X-inefficiency

→ lower returns for shareholders.

business objectives: survival advantages and disadvantages

Recession, high costs or cash shortages

→ risk of closure increases

→ firm prioritises covering operating costs and maintaining liquidity

→ profit or revenue maximisation becomes less important.

Evaluation: Survival is often a temporary priority. When conditions improve, objectives may shift towards growth or profit.

divorce of ownership from control - conflicting objecives

• managers may prioritise revenue or growth

Shareholders delegate decisions to managers

→ managers possess more information about daily operations

→ shareholders cannot fully monitor decisions

→ managers may pursue sales, size or status

→ output and investment differ from those chosen to maximise profit

→ shareholder returns may fall.

Evaluation: financial incentives

Managerial rewards linked to long-term profits or share value

→ managers benefit when shareholders benefit

→ interests become more closely aligned

→ profit maximisation may remain important.

• Managers may satisfice and seek personal benefits

Monitoring is weak

→ managers seek comfortable working conditions, perks or less demanding targets

→ costs rise or effort falls

→ acceptable rather than maximum profit is achieved

→ X-inefficiency may increase.

Evaluation: governance

Effective boards, audits and shareholder scrutiny

→ poor performance becomes more visible

→ threat of dismissal or intervention increases

→ managers have stronger incentives to control costs.

A substantial shareholder may influence governance even without working for the company.

• Objectives need not conflict

Managers favour expansion, product development or employee training

→ current profits fall

→ future efficiency and competitiveness improve

→ long-run shareholder returns rise.

Evaluation: Distinguishing worthwhile long-term investment from managerial empire building is difficult. Assess expected returns, not growth alone.

divorce of ownership from control - conflicting objectives:Managers may prioritise revenue or growth

Shareholders delegate decisions to managers

→ managers possess more information about daily operations

→ shareholders cannot fully monitor decisions

→ managers may pursue sales, size or status

→ output and investment differ from those chosen to maximise profit

→ shareholder returns may fall.

Evaluation: financial incentives

Managerial rewards linked to long-term profits or share value

→ managers benefit when shareholders benefit

→ interests become more closely aligned

→ profit maximisation may remain important.

divorce of ownership from control - conflicting objectives: managers may satisfice and seek personal benefits

Monitoring is weak

→ managers seek comfortable working conditions, perks or less demanding targets

→ costs rise or effort falls

→ acceptable rather than maximum profit is achieved

→ X-inefficiency may increase.

Evaluation: governance

Effective boards, audits and shareholder scrutiny

→ poor performance becomes more visible

→ threat of dismissal or intervention increases

→ managers have stronger incentives to control costs.

A substantial shareholder may influence governance even without working for the company.

State-owned versus private-sector objectives

• State ownership may prioritise social welfare

  Government considers wider benefits and access

  → charges lower prices or provides subsidies

  → consumption increases

  → disadvantaged groups gain access

  → social objectives take priority over maximum financial profit.

  Application: Subsidised university education may improve access and generate wider benefits from skills and knowledge.

  Evaluation: private organisations can have social objectives

  Private charities, cooperatives and other not-for-profit organisations

  → prioritise members, communities or educational outcomes

  → do not necessarily maximise profit.

  Charging fees does not by itself establish a profit-maximising objective.

• Private firms face pressure to earn returns

  Owners invest capital and bear risk

  → expect financial returns

  → managers face pressure to control costs and earn profit

  → profit and commercial growth may receive greater priority.

  Evaluation: state firms face financial constraints too

  Public funding has an opportunity cost

  → governments may require state organisations to cover costs or generate surpluses

  → efficiency and financial sustainability matter in both sectors

  → objectives overlap.

• Ownership affects priorities, but other factors matter

  State firms may pursue access, employment or national development

  → accept lower financial returns.

  Private firms may pursue profit

  → provide socially useful services when doing so attracts customers or improves reputation.

  Evaluation:

  Competition, leadership, stakeholder pressure and economic conditions

  → affect both types of organisation

  → firms may pursue several objectives simultaneously

  → ownership alone cannot determine behaviour.