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ECONOMICS THEME 3 - TOPIC 3.1 - BUSINESS GROWTH - Coggle Diagram
ECONOMICS THEME 3 - TOPIC 3.1 - BUSINESS GROWTH
sizes and types of firms
firms
grow
in order to make more money, gain monopoly power and for greater security
growth allows firms to experience
economies of scale
which helps to decrease costs of production, as well as selling more goods to increase revenue
larger firms have greater market share so they can influence prices
aswell as this, they will have more security during times of difficulty due to more assets and cash and will be less affected by a countries economy as they tend to operate in many countries
however, some firms remain
small
due to size of market, access to finance and owner objectives
principal agent problem
this is due to a separation of control
firms are owned by
shareholders
who play no part in day to day running
the separation causes problems due to the differing aims of two stakeholders (owners + directors/managers)
e.g owners want to maximize short run profits
public and private sector
private sector
refers to the part of the economy that is owned and run by individuals or groups of individuals
public sector
refers to the part which is owned or controlled by local or central government
profit + non-profit organizations
almost all private sector firms are run to make a profit and
maximize the financial benefits for their shareholders
however some firms, such as charities, strive to
maximize social welfare
business growth
2 types of growth are organic + integration
organic growth
where the firm grows by increasing their output e.g opening new stores
advantages
less risky and firms keep control over their business
disadvantages
organic growth may be too slow for directors who want to raise their salary and it requires new ideas
forward + backward vertical integration
this is growth through merger/amalgamation (joint ownership between 2 or more firms) or takeover
vertical integration
is the integration of firms in the same industry but at different stages of the production process
forward integration
is when a firm moves towards the customer,
backwards
is towards the supplier
advantages
new and increased potential for profit
with backwards integration, you rely less on suppliers
forward integration secures retail outlets which restricts access to competition
disadvantages
firms may have no expertise in the industry they took over
horizontal integration
this is where
firms in the same industry at the same stage of production integrate
advantages
reduces competition in industry
firms can mix expertise
disadvantages
will increase risk as "all eggs in one basket"
conglomerate integration
this is where firms in different industries with no obvious connections intergrate
advantages
useful for firms where there may be no room for growth in the present market
range of products reduces risks
disadvantages
firms won't have any experience or expertise in the new industry
constraints of business growth
size of the market
a market is limited to a certain size so only a certain amount of businesses can produce goods as there aren't enough consumers
access to finance
some firms are unable to grow cause they can't finance it
owners objectives
government regulation
Demergers
a
demerger
is a business strategy in which a single business is broken into two or more components, either to operate on their own or be dissolved
reasons for demergers
lack of synergies
- this is when the different parts of the companies have no real impact on each other. Lack of synergy means managers are splitting their time between two areas that are so different that it could lead to diseconomies of scale
value of the company/share price
- some companies demerge due to separate parts of the company being worth more than being combined
focused companies
- where the company focuses more on individual markets to become more succesful
impacts of demergers
workers
- could result in promotion but also job losses at the same time
businesses
- could result in higher efficiency + innovation but also can result in loss of economies of scale
consumers
- could result in better products + cheaper prices but could lose out with worse products and higher prices