3.1 - Business growth

Economies of scale

Advantages of large scale production as costs decrease and output increases

Why should businesses grow?

1. Economies of scale- firms can decrease cost of production - can sell more goods - more revenue - more profit

2. More security - can build up assets and cash that can be used in financial difficulties. Likely to sell a wider range of goods in more markets (diversification) - less vulnerable to changes in demand for specific products

3. Monopoly power - Greater market share - can influence prices and restrict new firms entering market - more profits

What is the principle agent problem?

• a divorce of ownership between the principal and agent

How to correct PAP?

• incentives for managers - performances based pay

• Give bonuses in form of shares - become more incentivised by company profit

What is Organic growth and how is this achieved?

• internal growth of a business using own capabilities and resources

• E.g Increasing existing production by investing in capital, opening new branches, new markets by exporting into emerging countries

• Growing consumer base by branding, new products - diversifying

What are advantages of Organic growth?

• Less risky

• Culture/practises protected

• Cheaper

• Can be financed by profits - no borrowing

• Retain control of company

Disadvantages of organic growth?

• Slower pace of growth

• Hard to keep shareholder happy - want quick returns

• Can’t access new expertise/knowledge

• May fall behind rivals

Advantages of vertical integration?

• increased market share - influence on prices - control over distribution channel and access to final customers

• Enhanced control over distribution - can improve brand presentation

Disadvantages of vertical integration?

• complacency with internal control over stages - companies may rely less on external innovation

• CMA - may block - higher prices

• PAP - controlling several stage of production

Advantages of horizontal merger?

• Cost savings from rationalisation - increases productivity

• Creates wider range of products - diversification - more opportunities for EOS

• Reduces competition - higher market share - pricing power

Disadvantages of horizontal mergers?

• risk of DEoS - clashes of management/culture

• CMA attention - less competition

• Sainsbury’s/Asda blocked 2019

Advantages of a conglomerate merger?

• Diversify - less reliant on 1 product and its demand

• Could cross sell products - more consumers e.g Argos in Sainsbury’s stores

• If 1 product demand declining - can invest in another market

Disadvantages of conglomerate integration?

• Loss of focus - core of business may suffer

• Less expertise

What are the constraints to business growth?

• Size of market - niche?

• Regulation - may block mergers

• Competition from new tech - tech changes have lowered barriers to entry e.g Monzo threat to Barclays - ‘creative destruction’

• Finance - limited access to loans?

Why should firms demerge?

• mergers may cause clashes in cultures - conflicts

• P-A-P - communication issues - DEoS

• Can give greater specialisation - focus on specific markets - increase productivity

• Smaller firms - more dynamic and responsive to changing consumer needs/preferences

• DEoS can be recovered

• Large firms ca alienate workers - lowers morale - lowers productivity

• E.g EBay and Paypal

Demerger - What is the impact on the businesses?

Advantages

• Can focus on core of business

• Can remove loss making areas of business - rationalisation

• Can increase efficiency

• Less regulation and better control over production process

But

• May be disruptive

• Smaller firm may not recover

• May find cost increases - having to duplicate functions such as finance/recruitment

Demerger - What is the impact on the Workers?

• enhanced job security

• Some workers may be displaced

Demerger - What is the impact on the Consumers?

• May be confusing

• More focuses form - better quality - can pass on cost savings to consumer

• In SR - supply may be disrupted/ prices may rise until efficiency gains seen