3.1 business growth
QUESTION
From the specification…
> Size and type of firms
• Why firms grow and why some stay small.
• Divorce of ownership and the principal agent problem.
• Public and private sector organisations.
• Profit and not for profit organisations.
> Business growth
• Organic growth.
• Forward and Backward vertical integration.
• Horizontal integration.
• Conglomerate integration.
• Constraints on business growth.
> Demerger
• Reasons for demergers.
• Impact of demergers.
ANSWER
, Why firms grow ?
Explain the 4 reasons firms grow ?
QUESTION
Profit motive =
> Businesses grow to improve returns for shareholders.
Cost motive =
> Economies of scale lead to lower average costs, this can help raise profit margins.
E.g larger firm = increased bargaining power over supplier = better deals = purchasing eos.
Market power motive =
> A larger firm means a larger market share so the business can dominate the market giving
them pricing power (ability to charge higher prices).
> A business with a large market share and economies of scale can create barriers to entry as
new firms will find it hard to match their size and low costs and steal customers. This prevents
the ability of other firms to enter the market.
Risk motive =
> Larger firms can sell a wider range of products and diversify across markets therefore
benefiting economies of scope. This means investors are more likely to invest.
ANSWER
, Why firms stay small ?
Explain the five reasons why firms stay small ?
QUESTION
Personalised services: Smaller firms are more flexible allowing them to offer a more
personal service meaning they can charge premium prices and create strong brand loyalty.
Size of the market is very small: If a firm is operating in a niche market and demand is low
the firm may not have room or potential to grow.
• However could expand into other markets.
Owners objective is to keep control of the business: owners may not want to risk losing
control of their business. However they could grow organically.
Limited access to finance: small firms may me regarded as high risk to banks, making them
unwilling to lend.
• However there are alternative sources of finance e.g crowd funding, venture capitalist,
become a partnership from a sole trade, float on the stock exchange.
Lack of economies of scale: there may be no incentive for firms to grow if there are no
potential costs savings. Growth may lead to diseconomies of scale.
• However firms could benefit from economies of scale if successful.
ANSWER
QUESTION
From the specification…
> Size and type of firms
• Why firms grow and why some stay small.
• Divorce of ownership and the principal agent problem.
• Public and private sector organisations.
• Profit and not for profit organisations.
> Business growth
• Organic growth.
• Forward and Backward vertical integration.
• Horizontal integration.
• Conglomerate integration.
• Constraints on business growth.
> Demerger
• Reasons for demergers.
• Impact of demergers.
ANSWER
, Why firms grow ?
Explain the 4 reasons firms grow ?
QUESTION
Profit motive =
> Businesses grow to improve returns for shareholders.
Cost motive =
> Economies of scale lead to lower average costs, this can help raise profit margins.
E.g larger firm = increased bargaining power over supplier = better deals = purchasing eos.
Market power motive =
> A larger firm means a larger market share so the business can dominate the market giving
them pricing power (ability to charge higher prices).
> A business with a large market share and economies of scale can create barriers to entry as
new firms will find it hard to match their size and low costs and steal customers. This prevents
the ability of other firms to enter the market.
Risk motive =
> Larger firms can sell a wider range of products and diversify across markets therefore
benefiting economies of scope. This means investors are more likely to invest.
ANSWER
, Why firms stay small ?
Explain the five reasons why firms stay small ?
QUESTION
Personalised services: Smaller firms are more flexible allowing them to offer a more
personal service meaning they can charge premium prices and create strong brand loyalty.
Size of the market is very small: If a firm is operating in a niche market and demand is low
the firm may not have room or potential to grow.
• However could expand into other markets.
Owners objective is to keep control of the business: owners may not want to risk losing
control of their business. However they could grow organically.
Limited access to finance: small firms may me regarded as high risk to banks, making them
unwilling to lend.
• However there are alternative sources of finance e.g crowd funding, venture capitalist,
become a partnership from a sole trade, float on the stock exchange.
Lack of economies of scale: there may be no incentive for firms to grow if there are no
potential costs savings. Growth may lead to diseconomies of scale.
• However firms could benefit from economies of scale if successful.
ANSWER
