3.1.2 Business Growth
Methods of Growth:
1) Organic / internal Growth: through sale of shares - increased investment - re-
sources of the company —RISK FREE but SLOW
2) External Growth: through mergers and takeovers
* Merger: the joining of 2 or more firms under a common ownership
Internal growth:
- Safer
- Economies of Scale
- Slower
External growth:
- Quicker
- Riskier
Motives for Mergers:
1) Quick Growth
2) Economies of Scale
3) May lead to Monopoly Power
4) Valuation of company rises - shareholders benefit
5) Easier Market access
6) Control of source of raw materials
Types of Mergers:
1) Horizontal integration :
- Same industry and same production levels
- Usually competitors
- Usually in industries with fewer firms = less competition / more market share and
power
* Advantages:
- Internal Economies of scale - reduction in costs
- Elimination of competition - increased market share + power
- No need for training - businesses grow in areas where they already have knowledge
- Cheaper / faster than organic growth
* Disadvantages:
- High Initial costs
- Poor management of integration
- Bureaucracy
- Investigation -competition authorities
,2) Vertical Mergers
- Same industry different production levels
- Forward Vertical: a supplier merging with his buyer
- Backwards Vertical: a purchaser merging with a supplier
*Advantages:
- Integration with supplier can reduce costs
- More control over the market (supplier and producers in one)
*Disadvantages:
- High costs of mergers
- Merger in area with limited knowledge and skills
3) Conglomerate Merger:
- Firms with no common interest that produce similar but related products
- Eg: Google and Youtube
*Advantages:
- Spreads out and reduces risk
- Offers opportunities for asset stripping - eg: patents
*Disadvantages:
- Competition is eliminated: does not benefit consumers / communities
- High initial costs
- No experience of the functionalities of the other business = mismanagement
Constraints on Business Growth:
- Limited size of the market
- For smaller firms: not easy to access finance to grow - if they want loans, they have
to pay higher interest rates etc
- Some are not willing to take up the risk of growing
- Patents and copyrights - LEGAL LIMITATIONS may exist
3.2.1 Business Objectives:
- A firm usually wants to achieve objectives set by its stakeholders -owners/sharehold-
ers/directors/managers/workers
- They may include:
1)Profit Maximisation
2) Revenue Maximisation
3) Sales Maximisation
, 1)Profit Max
(MC=MR). 2) Revenue Max
(MR=0) 3) Sales Max (AC=AR)
Profit Satisfying:
- When managers seek to maximise their own objectives (eg: sales max) while mak-
ing the minimum amount of profit required to keep shareholders happy.
- Often when increase in sales = increase in pay for managers
- All stakeholders have some demands, shareholders that they make profit, man-
agers/workers/directors are concerned with their salaries, consumers want quality
and governments, that firms obey laws
How are subsidies used to correct market failure
Collusion advantages disadvantages - small firms /
large firms
- Contestability 25 mark
3.3.1 Revenue
Total Revenue: TR = Price x Quantity
Average Revenue: AV = Total Revenue x Quantity
Marginal Revenue: MR = ΔTotal Revenue x ΔQuantity
— Total Revenue Max occurs when MR = 0
— At the TR Max, the PED is unitary elastic, PED = 1
Methods of Growth:
1) Organic / internal Growth: through sale of shares - increased investment - re-
sources of the company —RISK FREE but SLOW
2) External Growth: through mergers and takeovers
* Merger: the joining of 2 or more firms under a common ownership
Internal growth:
- Safer
- Economies of Scale
- Slower
External growth:
- Quicker
- Riskier
Motives for Mergers:
1) Quick Growth
2) Economies of Scale
3) May lead to Monopoly Power
4) Valuation of company rises - shareholders benefit
5) Easier Market access
6) Control of source of raw materials
Types of Mergers:
1) Horizontal integration :
- Same industry and same production levels
- Usually competitors
- Usually in industries with fewer firms = less competition / more market share and
power
* Advantages:
- Internal Economies of scale - reduction in costs
- Elimination of competition - increased market share + power
- No need for training - businesses grow in areas where they already have knowledge
- Cheaper / faster than organic growth
* Disadvantages:
- High Initial costs
- Poor management of integration
- Bureaucracy
- Investigation -competition authorities
,2) Vertical Mergers
- Same industry different production levels
- Forward Vertical: a supplier merging with his buyer
- Backwards Vertical: a purchaser merging with a supplier
*Advantages:
- Integration with supplier can reduce costs
- More control over the market (supplier and producers in one)
*Disadvantages:
- High costs of mergers
- Merger in area with limited knowledge and skills
3) Conglomerate Merger:
- Firms with no common interest that produce similar but related products
- Eg: Google and Youtube
*Advantages:
- Spreads out and reduces risk
- Offers opportunities for asset stripping - eg: patents
*Disadvantages:
- Competition is eliminated: does not benefit consumers / communities
- High initial costs
- No experience of the functionalities of the other business = mismanagement
Constraints on Business Growth:
- Limited size of the market
- For smaller firms: not easy to access finance to grow - if they want loans, they have
to pay higher interest rates etc
- Some are not willing to take up the risk of growing
- Patents and copyrights - LEGAL LIMITATIONS may exist
3.2.1 Business Objectives:
- A firm usually wants to achieve objectives set by its stakeholders -owners/sharehold-
ers/directors/managers/workers
- They may include:
1)Profit Maximisation
2) Revenue Maximisation
3) Sales Maximisation
, 1)Profit Max
(MC=MR). 2) Revenue Max
(MR=0) 3) Sales Max (AC=AR)
Profit Satisfying:
- When managers seek to maximise their own objectives (eg: sales max) while mak-
ing the minimum amount of profit required to keep shareholders happy.
- Often when increase in sales = increase in pay for managers
- All stakeholders have some demands, shareholders that they make profit, man-
agers/workers/directors are concerned with their salaries, consumers want quality
and governments, that firms obey laws
How are subsidies used to correct market failure
Collusion advantages disadvantages - small firms /
large firms
- Contestability 25 mark
3.3.1 Revenue
Total Revenue: TR = Price x Quantity
Average Revenue: AV = Total Revenue x Quantity
Marginal Revenue: MR = ΔTotal Revenue x ΔQuantity
— Total Revenue Max occurs when MR = 0
— At the TR Max, the PED is unitary elastic, PED = 1
