2.1 Flashcards
what is the objective of growth?
to achieve EOS (internal and external)
when do internal EOS occur?
when a firm becomes larger and AC of production fall as output increases
what are examples of internal EOS?
risk bearing
financial
managerial
technological
marketing
purchasing
what is risk-bearing EOS?
when a firm becomes larger, they can expand their production range, therefore they can spread the cost of uncertainty, if one part is not successful they have other parts to fall back on
what is financial EOS?
banks being willing to lend loans more cheaply to larger firms because they are deemed less risky therefore larger firms can take advantage of cheaper credit
what is managerial EOS?
larger firms are more able to specialise and divide their labour, they can employ specialist managers and supervisors, which lower AC
what is technological EOS?
larger firms can afford to invest in more advanced and productive machinery and capital which will lower their AC
what is marketing EOS?
larger firms can divide their marketing budgets across larger outputs so the AC of advertising per unit is less than that of a smaller firm
what is purchasing EOS?
larger firms can bulk-buy which means each unit will cost them less e.g. supermarkets having more buying power from farmers than corner shops, so they can negotiate better deals
what are external EOS and examples?
EOS that occur within the industry e.g. local roads might be improved so transport costs for local industries will fall
infrastructure, skilled labour, taxation and R&D
what is the LRAC?
a measure of the lowest cost at which a firm can produce a given level of output in the long run when all inputs are variable
what is the MES?
a scale of production where internal EOS have been fully exploited it corresponds to the lowest point on the LRAC curve
what is market power?
large firms have more dominance over the market which allows them to gain price setting powers and discourage the entrance of new firms
what can increases market power over consumers and suppliers mean?
they might gain monopsony power which can allow them to buy their stock at a lower price
what is a monopoly?
a market containing a single firm that has or is close to total control of the sector, a business is said to have monopoly power if it owns 25% + market share
what is an oligopoly?
a market dominated by a few producers each of which has some control over the market
what is monopsony power?
when a business has power over suppliers because of its market share
what does a firm have a competitive advantage?
when a firm’s products are deemed to be better than its competitors by consumers
how can a firm gain competitive advantage?
using price, quality, cost or through a niche market
when does a firm gain a competitive advantage?
when it can lower its AC and create maximum value to consumers e.g. skilled workforce
but it’s hard to maintain a cost competitive advantage so firms have to offer other benefits too e.g. strong brand reputation
what happens when firms increase their brand loyalty?
demand becomes more inelastic
why can it be hard for new firms to gain consumer loyalty?
one firm’s brand name may already be strong
what is a profit motive?
by growing firms get the opportunity to earn higher profits, growing can allow firms EOS, guaranteed they don’t grow too big and get DEOS
what are the 2 problems from growth?
DEOS
potential skills shortages
when do DEOS occur?
when output passes a certain point and AC start to increase per extra unit produced
what are the 3 examples of DEOS?
control
coordination
communication
what is control as a DEOS?
it becomes harder to monitor how productive the work force is as the firm becomes larger
what is coordination as a DEOS?
it is harder to coordinate workers when there are thousands
what is communication as a DEOS?
workers may feel excluded as firms grow which can lead to demotivation and an increase in AC
what might happen if potential skills shortages impact the productivity of workers, the cost of wages and competitiveness?
it might lead to higher wages since firms have to compete to attract scarce employees this is because the demand for labour exceeds supply
what does corporate culture include?
shared values of a firm, implicit beliefs impacting aspects of working life and day to day behaviour of employees
what is organic (internal) growth?
when firms grow by expanding their production through increasing output widening their consumer base by developing a new product or by diversifying their range
how can a firm grow inorganically?
through merging, acquiring or taking over another firm
what are the negatives of organic growth?
it is a long term strategy and slower than inorganic
firms might rely on the strength of the market
what are the positives of organic growth?
it is less risky than inorganic
firms grow by building on their strengths and using their own funds
existing shareholders retain their control
when does vertical integration occur?
when a firm merges/takes over another firm in the same industry but a different stage of production
what is forward vertical integration?
when the firm integrates with another firm closer to the consumer this involves taking over a distributor
what is backward vertical integration?
when a firm integrates with a firm closer to the producer, this involves gaining control of suppliers
what are the positives of vertical integration?
firms can increase efficiency through EOS
firms can gain more control of the market
firms have more certainty over production
what are the negatives of vertical integration?
potential DEOS and barriers to entry
what is horizontal integration?
the merger of 2 firms in the same industry and the same stage of production
what are the positives of horizontal integration?
firms can grow quickly
increase in output therefore EOS
greater expertise and knowledge
what is the negative of horizontal integration?
disagreements in objectives
what is conglomerate integration?
the combining of 2 firms with no common connection
what is the negative of conglomerate integration?
product range may get too thin and quality can decrease whilst production costs increase
what are the positives of conglomerate integration?
it can help both firms be stronger
it can reduce market competition
EOS
what is R&D?
investment in research with the intention of improving products, introducing new ones, or improving methods of production
what can R&D do to increase market power?
it can help give products a USP by differentiating them from rivals this could help increase brand loyalty and revenue
what can technological change do?
improve efficiency and productivity which could lower costs of production it can also lead to the development of new markets, products and may destroy existing markets
what are SMEs and what do they do?
small and medium sized enterprises that are key for creating a competitive market, they create jobs, stimulate innovation and investment and promote a competitive environment
what is product innovation?
adapting a product that already exists usually without a patent
what are the benefits of increases in R&D
higher levels of economic growth which can mean increases in GDP, higher incomes and lower unemployment rates
why are the benefits of increases in R&D limited?
because not enough is done, this is to do with market failure, since positive externalities are not fully understood it is also expensive to fund R&D
how do you overcome the limited benefits of increased R&D?
the state provides funding
give 4 examples of extension strategies.
more spending on advertising
changing packaging and branding
changing price
removing the product from the market
what is the digital economy?
the use of any form of digital technology
give 7 examples of digital technology.
SEO (search engine optimisation)
social media
viral marketing
digital display boards
SMS messages
targeted feeds
online advertising
what is e-commerce?
when buyers and sellers meet to trade in a virtual market place e.g. the internet
what are the 3 categories of e-commerce?
price comparison websites
viral marketing e.g. blogs and forums
social media
what is micromarketing?
a marketing strategy focusing advertising on a small group of consumers within a niche market
what is market information?
in theory, competitive market models assume that buyers and sellers all have full perfect information, in reality markets commonly have asymmetric information
what does HRM (human resource management) involve?
using the workforce of the company in the most productive way
one element of HRM is the identification of employee positions and the process of attracting the right calibre of worker to fill these positions (recruitment)
what is the long tail phrase?
a statement by Anderson who suggested that products with low demand can still create an effective market given a large enough distribution channel
what does conventional wisdom in retail say?
the most popular 20% of products account for 80% of sales
what has the increasing popularity of the digital economy affected?
how consumers access and consume products
what has been a result of technological change?
improvements in efficiency and productivity which could lower costs of production for firms
it can lead to the development of new products, new markets and may destroy existing markets
what has the digital economy opened up?
existing markets to new competition
it can be argued that the process of creative destruction has been accelerated
what are the 5 ways small firms survive in competitive markets?
product differentiation and USPs
competitive advantage through relationships with stakeholders
EOS relative to market size
DEOS of larger firms
and being monopolists
what is meant by EOS relative to market size?
large firms might only experience small EOS compared to their size, since the extent of EOS might be limited in that industry, this could make their costs higher than smaller firms
what is meant by DEOS?
larger firms could face high costs because they have grown too quickly this could be because of poor organisation inefficiency or because firms in large formal markets have to pay higher wages
what is meant by small firms as monopolists?
small firms could hold some degree of monopoly power since they provide a more personal, local service
they might also create a niche market where they can use their relatively price inelastic demand to charge higher prices
