Business Growth

What are firms?
They exist in order to organise production, they bring together various factors of production and organise the production process in order to produce output.
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What is an industry?
The term used to describe a collection of firms operating in the same production process.
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Why are there different types of firms?
They are various sizes, may not all aim to make a profit, could operate in different sectors.
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How could firms be various sizes?
They could be a small enterprise run by a sole trader, or a huge multinational business operating in various countries around the world.
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Why do only some firms aim to make a profit?
Most firms aim to make aofit however some firms might be not-for-profit such as charities or social enterprises.
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What are social enterprises?
These are organisations that do not have profit as a goal but use any profit or surplus they generate to support their aims.
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What is the private sector?
Firms that are not owned by the state, they may be owned by share holders. They also include sole proprietors which are owned and run by one person. Private sector firms will aim to make a profit to satisfy the demands of their owners.
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What is the public sector?
Firms that are government owned. This could be because they could not survive without significant state funding or because the government wishes to determine the direction businesses take. The goods/services can't be left to the free market.
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Why can't public sector goods be left to the free market?
They could be very important, for example goods and services involved in defence. Also public goods would not be provided by the free market because of the free rider problem.
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Why might firms expand?
More profits from a selling to a bigger market, decrease in costs as they are spread over the larger firm, more market power, reducing the risk by spreading out the risk on more shops for example, to have a better status (non pecuniary benefits).
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How can businesses grow?
Inorganically and organically.
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What is inorganic growth?
Takeovers and mergers (horizontal, forward vertical, backward vertical, conglomerate)
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What is organic growth?
This occurs where a business grows internally by reinvesting profits or borrowing from banks. E.G, Hiring new staff, opening a new store, developing and launching a new product, franchising.
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What are the benefits to to the business of organic growth?
Less risky than other methods as it is slower with more control, helps the business build on the strengths it already has.
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What are the drawbacks to the business of organic growth?
Can be slow, growth might only be achieved if the market overall is growing, difficult to achieve this type of growth if there is already a strong leader in the market.
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What are the benefits to other parties of organic growth?
There is more job security for employees.
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What are the drawbacks to other parties of organic growth?
It may feel slow for directors and managers.
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What is horizontal integration?
This occurs when two businesses at the same stage of production in the same industry join together.
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What are the benefits to the business of horizontal integration?
Allows firms to benefit further from economies of scale as they grow in size, it reduces the amount of competition by merging with rivals so then allows firms to have a larger market share and potentially raise prices.
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What are the drawbacks to the business of horizontal integration?
Possible culture clashes between the firms causing unsuccessful integration, too heavily invested in one industry increasing risk, diseconomies of scale might arise due to being beyond MES causing a lack of co-ordination, expensive way of growing.
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What are the benefits to other parties of horizontal integration?
More opportunities as it is a bigger firm.
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What are the drawbacks to other parties of horizontal integration?
Workers could lose a connection with business as it has grown bigger so it could lead them to not care about working there, they could lose their job because of how many people work there from both firms.
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What is vertical integration?
This occurs when two businesses at different production stages in the same industry join together. This can be forward, a supplier taking over a customer or backward, where a firm integrates with another firm before their stage of production.
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What are the benefits to a business of vertical integration?
Greater control over the suppliers which makes it more able to access raw materials with lower costs and increased quality, restricts supply to rival firms, more control over where and how products are sold which preserves the brand image.
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What are the drawbacks to a business of vertical integration?
Possible culture clashes, may have little expertise in the particular industry they have joined, expensive way of growing, diseconomies of scale may arise, firms may become too heavily invested in one industry increasing risk.
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What is conglomerate integration?
This is where two businesses in different industries join together.
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What are the benefits to a business of conglomerate integration?
Reduced risk as now more than one industry is operated in, may increase awareness of the brand.
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What are the drawbacks to a business of conglomerate integration?
Less likely to lead to economies of scale as the business can lose focus as the activities are so diverse, may lack expertise in this industry, possible culture clashes.
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Why might some firms remain small?
Lack of finance for expansion, low output requires to reach MES, avoiding diseconomies of scale, customer relationship, higher production costs may be associated with larger firms, size of market, owners objectives.
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Why is lack of finance for expansion a reason firms remain small?
They may want to grow but don't have access to the required finances.
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Why is low output required to reach minimum efficient scale a reason firms remain small?
A large number of firms may be able to operate at the minimum efficient scale of production, if its low. There may be a lack of need to grow to an overly large to take advantage of economies of scale.
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Why is avoiding diseconomies of scale a reason firms stay small?
Firms may not want to expand to avoid problems of diseconomies of scale as it could lead to co-ordination issues and rising costs.
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Why is customer relationships a reason firms stay small?
Some businesses feel that by staying small, they can better meet their customers needs by getting to know them, developing a business relationship and delivering personal services.
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Why is higher production costs associated with being larger a reason firms stay small?
Small firms will be able to access additional training grants and government financial support.
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Why is the size of the market a reason firms stay small?
If firms serve in a niche market that will not support expansion then their is little need for growth. A business may have already saturated if the business is operating as a local monopoly.
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Why is the owners objectives a reason firms stay small?
An expansion could mean increased rewards but perhaps the opportunity cost in terms of leisure will be too much for a sole trader and therefore they remain small. In other words they lack the motivation to expand, satisficing.
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What is satisficing?
Where a firm makes just enough profit to stay in business and then allows other motives to take precedence.
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What is the divorce of ownership from control?
An example of a cause of the principal-agent problem. This occurs when one group, the agent, is making decisions on behalf of another group, the principal.
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How is it easier for small firms to avoid divorce of ownership and control and the principal agent problem?
In small firms, the owner is likely to be running the business on a day to day basis. it is quite easy for them to run their business in a way that achieves there own objectives.
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Why is it more likely for larger firms to experience a divorce of ownership and control and the principal agent problem?
The larger the firm, the more likely it is that the owners will take less or no part in the running of the firm, instead they appoint directors and managers, causing a divorce of ownership of control of the day to day runnings.
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What does a large company include?
Board of directors with a chair of the board and the chief executive. Most board members will be part time and will have little involvement.
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Who does the chair of the board represent?
The shareholders, the owners of the company.
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What is a demerger?
When a business sells off one or more of the businesses that it owns, into a separate company.
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What is a synergy?
Refer to when two firms combined lead to a greater outcomes than the sum of individual parts. Sometimes referred to as 2+2=5.
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Why do firms demerge?
Lack of synergies, protecting the value of the firm and raising funds, to meet requirements of competition authority regulators, creating more focused firms and cultural differences.
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Why would firms demerge because of a lack of synergies?
Because management may feel that there are no synergies between parts of the firm. This means that one part of the firm is having no impact on the more efficient and profitable running of other parts of the firm. There may be diseconomies of scale.
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Why would firms demerge to protect the value of the firm and raise funds?
Firms can sell off parts of their business which can help increase profitability, it can also help to protect the value of the company as if a company is performing poorly it can drag down the value of the company as a whole.
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Why would firms demerge to meet requirements of competition authority regulators?
Because the government check mergers and takeovers before they occur to ensure they do not lead to a substantial lessening of competition. The government may also force firms to split to increase competition in markets.
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Why would firms demerge to create more focused firms?
In recent years there is a trend of creating firms which are highly focused on just one or two key markets. This is so that management can deliver higher profits and growth by concentrating their energy on getting to know/exploiting limited markets.
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Why would firms demerge if there was cultural differences?
Because the merger may not work the way that had been anticipated because of differences in the way they operate. This could be that some firms have a formal way or working and others may having an informal way.
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What does a demerger mean for businesses?
It can focus on the core product, reduce the risk of diseconomies of scale, raise money from selling assets however it could be expensive initially and it creates more competition.
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What does a demerger mean for workers?
There would be less job security as firms are trying to save money so could cut costs by cutting workers and the firm could relocate meaning they may have travel, move or get another job.
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What does a demerger mean for consumers?
There would be more choice as there would be more firms in the market which would also mean that there would be lower prices.
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Other cards in this set

Card 2

Front

What is an industry?

Back

The term used to describe a collection of firms operating in the same production process.

Card 3

Front

Why are there different types of firms?

Back

Preview of the front of card 3

Card 4

Front

How could firms be various sizes?

Back

Preview of the front of card 4

Card 5

Front

Why do only some firms aim to make a profit?

Back

Preview of the front of card 5
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