Business growth
Why firms stay small:
Scope for economies of scale is limited and want to avoid
diseconomies of scale. – Lots of layers of managers.
Might be part of niche markets – small, specialist products
due to low PED.
Limited market size
To avoid principal – agent problem
To avoid taxes
Reasons for growth:
One is to influence the price and increase market share in
order to increase profits. “The high street retailer will offer
600 products for delivery in as little as 20 minutes”.
Another is to diversify: Diversifying holdings can increase
the chances of making more money. Instead of just
focusing on food products they have diversified to
stationery to attract more consumers.
Integration
Horizontal integration is when two firms in the same industry
and same stage of production combine and become a single
entity.
Synergies:
Cost synergies - These are achieved when companies
reduce costs by streamlining operations, eliminating
, redundant processes, and taking advantage of economies
of scale.
For two airlines, one company may have a better fleet of
planes, and one would have permission to land on
Heathrow landing strip. Both have flight attendants, pilots,
other members of staff so don’t have to get more.
Forward vertical merger is when a firm acquires a business
that is higher up in the supply chain closer to the market.
Benefits of forward vertical integration:
Open to larger market base and more customers leads to
greater revenue.
Increased market power: A company can gain more
control over distribution channels and access to final
customers. This can increase market power and
bargaining position with retailers or distributors.
Benefits of backward vertical integration:
Don’t have to rely on a 3rd party for resources so you have
regular revenue can lead to planned investment.
Control resource production and leads to higher revenue
and market share. You can control price of resources and
sell at higher prices.
Reduces likelihood of diseconomies of scale. Reduces
communication and coordination failure.
Better control over retail distribution channels + adding
new channels to sales platforms to build business
revenues
A takeover is when a firm buys a majority share (51%) of a
business.
, Demerger:
When a business’s operations are separated to form two
different entities.
One reason is due to falling revenues for the single entity
There may be a lack of synergies due to lack of
complimentary products
Huge financial costs of merger may not be recouped.
Systems may not integrate, different technologies.
Leads to job losses as duplicate workers will be let go of.
May be due to principal-agent problem as there is a
divorce of ownership. Leads to x-inefficiency and
information gap. Eval – reward mangers a share ownership
scheme.
Joint ventures:
Two entities working together on a common project.
Google and Nasa working on google maps.
Perfect competition
Homogenous goods – no barriers to entry and exit
Many buyers and sellers
Firms don’t have price-setting power
Price set by market forces of supply and demand
Small market share
Perfect knowledge
All firms profit maximising
Firms cannot make normal profit because supernormal
profit attracts new firms in the market as there are no
barriers to entry and exit.
Short run supernormal profit attract firms as they have
perfect knowledge.
Why firms stay small:
Scope for economies of scale is limited and want to avoid
diseconomies of scale. – Lots of layers of managers.
Might be part of niche markets – small, specialist products
due to low PED.
Limited market size
To avoid principal – agent problem
To avoid taxes
Reasons for growth:
One is to influence the price and increase market share in
order to increase profits. “The high street retailer will offer
600 products for delivery in as little as 20 minutes”.
Another is to diversify: Diversifying holdings can increase
the chances of making more money. Instead of just
focusing on food products they have diversified to
stationery to attract more consumers.
Integration
Horizontal integration is when two firms in the same industry
and same stage of production combine and become a single
entity.
Synergies:
Cost synergies - These are achieved when companies
reduce costs by streamlining operations, eliminating
, redundant processes, and taking advantage of economies
of scale.
For two airlines, one company may have a better fleet of
planes, and one would have permission to land on
Heathrow landing strip. Both have flight attendants, pilots,
other members of staff so don’t have to get more.
Forward vertical merger is when a firm acquires a business
that is higher up in the supply chain closer to the market.
Benefits of forward vertical integration:
Open to larger market base and more customers leads to
greater revenue.
Increased market power: A company can gain more
control over distribution channels and access to final
customers. This can increase market power and
bargaining position with retailers or distributors.
Benefits of backward vertical integration:
Don’t have to rely on a 3rd party for resources so you have
regular revenue can lead to planned investment.
Control resource production and leads to higher revenue
and market share. You can control price of resources and
sell at higher prices.
Reduces likelihood of diseconomies of scale. Reduces
communication and coordination failure.
Better control over retail distribution channels + adding
new channels to sales platforms to build business
revenues
A takeover is when a firm buys a majority share (51%) of a
business.
, Demerger:
When a business’s operations are separated to form two
different entities.
One reason is due to falling revenues for the single entity
There may be a lack of synergies due to lack of
complimentary products
Huge financial costs of merger may not be recouped.
Systems may not integrate, different technologies.
Leads to job losses as duplicate workers will be let go of.
May be due to principal-agent problem as there is a
divorce of ownership. Leads to x-inefficiency and
information gap. Eval – reward mangers a share ownership
scheme.
Joint ventures:
Two entities working together on a common project.
Google and Nasa working on google maps.
Perfect competition
Homogenous goods – no barriers to entry and exit
Many buyers and sellers
Firms don’t have price-setting power
Price set by market forces of supply and demand
Small market share
Perfect knowledge
All firms profit maximising
Firms cannot make normal profit because supernormal
profit attracts new firms in the market as there are no
barriers to entry and exit.
Short run supernormal profit attract firms as they have
perfect knowledge.
