BUSINESS GROWTH

Suggest a reason why some firms choose to grow

TO GAIN STRONGER MARKET POWER TO INCREASE PROFITS

What is meant by ECONOMIES OF SCALE?

Economies of scale are the REDUCTIONS IN AVERAGE COSTS as a firm INCREASES ITS OUTPUT

All firms aim to grow larger

TRUE OR FALSE?

FALSE

Some firms intentionally CHOOSE to remain SMALL

What is a REASON for some firms to REMAIN SMALL?

Offer a MORE PERSONALISED SERVICE and focus on NON - PRICE FACTORS

Define the PRINCIPAL - AGENT PROBLEM

The CONFLICT OF INTEREST that develops between a company’s OWNERS and its MANAGERS as it GROWS LARGER

What is meant by a PUBLIC SECTOR organisation?

OWNED AND CONTROLLED BY THE GOVERNMENT

How do PRIVATE SECTOR organisations differ from those in the PUBLIC SECTOR?

Private sector organisation= OWNED AND CONTROLLED BY PRIVATE INDIVIDUALS

Public sector organisation = OWNED AND CONTROLLED BY THE GOVERNMENT

What is assumed to be the MAIN OBJECTIVE of most PRIVATE SECTOR organisations?

TO MAXIMISE PROFITS by operating at an output where MARGINAL COSTS (MC) = MARGINAL REVENUE (MR)

What are NOT -FOR-PROFIT organisations?

Operate to PROVIDE A SERVICE OR MEET A NEED RATHER THAN TO MAKE A PROFIT

Not - for - profit organisations NEVER sell goods or services

TRUE OR FALSE

FALSE

Not - for - profit organisations can sell goods or services and then USE THE PROFITS TO FURTHER THEIR OBJECTIVES

What is meant by PROFIT SATISFICING?

Profit satisfying is when business owners aim for an ACCEPTABLE QUALITY OF LIFE with a RESPECTABLE LEVEL OF PROFITS rather than profit maximising

How do principals attempt to adress the PRINCIPAL - AGENT PROBLEM?

Principals attempt to address the principal - agent problem by granting SHARE OPTIONS TO MANAGERS. This ALIGNS THEIR INTERESTS WITH THOSE OF THE OWNERS.

What is ORGANIC growth?

Organic growth is when firms expand INTERNALLY by opening more outlets, buying better tech and employing more labour

What does INORGANIC growth mean?

Inorganic growth is when firms expand through EXTERNAL methods like mergers, takeovers or acquisitions

What is FORWARD VERTICAL INTEGRATION?

When a firm JOINS with another firm IN THE SAME INDUSTRY at a LATER STAGE of production (e.g ice cream manufacturer buying an ice cream shop)

Define BACKWARD VERTICAL INTEGRATION

Firm JOINS with another firm in the SAME INDUSTRY at an EARLIER STAGE of production (e.g. ice cream manufacturer and its dairy supplier)

What is HORIZONTAL INTEGRATION?

When a firm JOINS with another firm in the SAME INDUSTRY at the SAME STAGE OF PRODUCTION (two clothing retailers)

Define CONGLOMERATE INTEGRATION

Conglomerate integration is when a firm JOINS with another firm in an UNRELATED INDUSTRY (food manufacturer taking over football club)

What is an ADVANTAGE of ORGANIC growth?

The PACE OF GROWTH can be CONTROLLED and is manageable

Vertical integration ALWAYS REDUCES COSTS

TRUE OR FALSE

FALSE

Vertical integration can LEAD TO DISECONOMIES OF SCALE. This INCREASES AVERAGE COSTS

What is an ADVANTAGE of HORIZONTAL integration?

RAPID INCREASE IN MARKET SHARE

How can the SIZE OF A MARKET constrain business growth?

LIMITING the number of POTENTIAL CUSTOMERS especially in NICHE MARKETS

What is a DISADVANTAGE of CONGLOMERATE integration?

A disadvantage of conglomerate integration is a possible LACK OF EXPERTISE in NEW PRODUCTS OR INDUSTRIES

How can the OBJECTIVES OF OWNERS constrain business growth?

When they prefer to EXPAND only TO A POINT that provides an ACCEPTABLE STANDARD OF LIVING

What is a DEMERGER?

When a firm SELLS OFF AT LEAST ONE PART of the business it owns. It may SPLIT ITSELF INTO SEPARATE parts to CREATE TWO OR MORE FIRMS

Define DISECONOMIES OF SCALE

INCREASES IN AVERAGE COSTS as a FIRM GROWS BEYOND its OPTIMUM SIZE

Why do DEMERGERS occur?

REDUCE DISECONOMIES OF SCALE

How can a company’s BUSINESS FOCUS be affected by Demergers?

Enabling it TO CONCENTRATE on its OPERATIONS MORE NARROWLY. This could INCREASE PROFITABILITY

CULTRUAL DIFFERENCES are a common reason for Demergers

TRUE OR FALSE

TRUE

E.g. Benz and Chrysler

How might DEMERGERS affect EMPLOYEES?

May have a NEGATIVE IMPACT on employees as some workers may LOSE THEIR JOBS (as there will be layoffs)

How can DEMERGERS affect CONSUMERS

IMPROVED PRODUCT QUALITY and CUSTOMER SERVICE which could have a POSITIVE IMPACT on consumers

State a possible FINANCIAL GAIN for a business from demerging

INCREASED LIQUIDITY and DIVIDEND PAYMENTS in the year of the demerger

How might DEMERGERS affect EFFICIENCY?

Demergers can INCREASE PRODUCTIVE EFFICIENCY by LOWERING AVERAGE COSTS

Why might businesses be REQUIRED TO DEMERGE?

COMPLYING WITH THE COUNTRY’S COMPETITION AUTHORITIES. In the UK< this is the Competition and Markets Authority (CMA)

Demergers always result in JOB LOSSES

TRUE OR FALSE

FALSE

Demergers can also PROVIDE MORE OPPORTUNITIES for promotion IN A SMALLER WORKFORCE

What effect might Demergers have on the RANGE OF PRODUCTS?

Can have a NEGATIVE IMPACT on the product range. They can result in FEWER AVAILABLE products