Why business remains small
1. Avoid diseconomies of scale
- X-inefficiency (managerial slack) / productively inefficient
- lack of economies of scale relative to limited market size (niche/local)
- saturated market
2. Owners wish to maintain control
- business objectives (profit motive)
- offer a more personal customer service
- acts as a regional monopoly = charge higher prices
- eval: regulation may prevent expansions
3. Lack of finance for expansion
- barriers to entry for expansions
- higher unit costs and fixed costs
Principal agent problem = divorce of ownership from control
objectives of agents differ from principals: in theory, agent should maximise principals
benefits, but due to moral hazard, they, in practice, maximise their own benefits -> profit
satisficing
- Owners aim to short run profit maximise
- Shareholders aim to increased dividends/shares
Organic growth
- ‘internal growth’ = business grows naturally without the need to takeover (acquisition)
or merge
- borrowing from banks rather than finance from a takeover
- aims to: increase output / expand consumer base / investment into innovation, new
products and R&D / diversification = internal economies of scale (e,g Apple products)
less risky than inorganic growth
little strategic input required = more sustainable growth
less vulnerable to failures in merged business’ growth
competing firms in market may grow faster via acquisitions so firm loses its market share
and market power = less profits in long run
Merger
- unites two existing firms which agree to form a new company, combing the assets of
both
Inorganic growth
Forward vertical integration: merger between firms in the same industry but different stage of
production (BT & EE)
- towards the consumer
Backward vertical integration: merger between firm and its close producer, so at different
stage of production (2014: Rolls-Royce Motor Cars acquired RRPS engine supplier for
£1.93bn)
- towards the raw materials in the supply chain
1. Avoid diseconomies of scale
- X-inefficiency (managerial slack) / productively inefficient
- lack of economies of scale relative to limited market size (niche/local)
- saturated market
2. Owners wish to maintain control
- business objectives (profit motive)
- offer a more personal customer service
- acts as a regional monopoly = charge higher prices
- eval: regulation may prevent expansions
3. Lack of finance for expansion
- barriers to entry for expansions
- higher unit costs and fixed costs
Principal agent problem = divorce of ownership from control
objectives of agents differ from principals: in theory, agent should maximise principals
benefits, but due to moral hazard, they, in practice, maximise their own benefits -> profit
satisficing
- Owners aim to short run profit maximise
- Shareholders aim to increased dividends/shares
Organic growth
- ‘internal growth’ = business grows naturally without the need to takeover (acquisition)
or merge
- borrowing from banks rather than finance from a takeover
- aims to: increase output / expand consumer base / investment into innovation, new
products and R&D / diversification = internal economies of scale (e,g Apple products)
less risky than inorganic growth
little strategic input required = more sustainable growth
less vulnerable to failures in merged business’ growth
competing firms in market may grow faster via acquisitions so firm loses its market share
and market power = less profits in long run
Merger
- unites two existing firms which agree to form a new company, combing the assets of
both
Inorganic growth
Forward vertical integration: merger between firms in the same industry but different stage of
production (BT & EE)
- towards the consumer
Backward vertical integration: merger between firm and its close producer, so at different
stage of production (2014: Rolls-Royce Motor Cars acquired RRPS engine supplier for
£1.93bn)
- towards the raw materials in the supply chain
