3.1 Flashcards
Explain why some firms tent to remain small and why others grow
Why small -
No E.O.S possible
Easy to enter - low barriers+ low capital requirments
Market size is limited
Owners objective - avoid risk/profit satisfying
Why large-
Need E.O.S
High barriers to enter
Objective - profit maximising/ sales maximising
Gain high market share - less choice for consumer - increased market power
Explain the meaning of the divorce of ownership and control in a business (principal-agent problem)
Problem is that the principal cannot always ensure that the agent runs the company in the way they would like
Explain the potential problems that the divorce of ownership and control in a business might create
The objectives of the owners may be different to the objectivees of the managers
eg Whilst the shareholder may want profit to be maximised, the directors/ management of the company may not have the same direct incentive to meet this objective
Explain how a business might overcome the problem of the divorce of ownership and control
To overcome the principal-agent problem, the owner can attempt to provide incentives in such a way that the managers are encouraged to follow the owners objectives
eg. Bonuses for managers hitting certain targets
Explain how a business might overcome the problem of the divorce of ownership and control
To overcome the principal-agent problem, the owner can attempt to provide incentives in such a way that the managers are encouraged to follow the owners objectives
eg. Bonuses for managers hitting certain targets
Explain how being in a small industry acts as a constraint on business growth
Businesses achieving success in local, or niche marets may find limits on scalability as there is not enough consumer spending
Explain how lacking access to finance (eg bank loans) acts as a constraint on business growth
Many SMEs run up against finance constraints including limited access to loans and risks+costs of raising equity in capital markets. In the aftermath of the Global Financial Crisis, commercial banks are more risk-adverse when it comes to lending to businesses and may charge a “risk premium” when lending to SMEs
Explain how having business objectives which don’t prioritise growth acts as a constraint on business growth
The owner may not wish to expand because it makes the firm easier to manage and workers may be more loyal and motivated. Seen in ‘keep it in the family businesses’
Explain how Government regulation through the Competition and Markets Authority (CMA) acts as a constraint on business growth
Some firms are vulnerable to grow because governments may use regulations to ensure markets remain competitive and to prevent the develeopment of monopolies
Explain what is meant by internal and external growth (organic and inorganic)
Internal - Refers to the increase in output and sales of a business using internal resources
External- Involves the expansion of a business by merger or takeover
Explain the external growth - Horizontal integration
When firms merge at the same stage of the same production process.
Explain the external growth- Forward and backward vertical integration
When firms merge at different stages of the production process
Backwards- When a firm merges with a supplier
Forwards- When a firm buys a firm in the same production process but closer to the customer
Explain the external growth conglomerate integration
Occurs when a firm buys another firm in a completly unrelated business
Explain the advantages of internal growth
Less risky (expansion is paid for by your success) + less expensive than inorganic growth
Explain the disadvantaged of internal growth
Growth tends to occur at a slower rate
Growth is limited to current sales
Explain the advantages of horizontal integration
Gain E.O.S, increase market share, eliminate competitor, increase customer base - increased revenue
Explain the disadvantages of horizontal integration
Risk focused on narrow goods/services, Dis E.OS may occur, some workers may lose jobs
Explain the advantages of forward vertical integration
Obtain higher profit margins
Control the price/marketing/image
Explain the advantages of backwards vertical integration
Cost savings as the purchase of the product
Control over supply of product (blocks the competition)
Explain the advantages+disadvanages of conglomerate integration
Decreased risk, Helpful if market is saturated
Dis- Lack of expertise in new area
Brands may be dilluted
DIfferences in cultures may cause conflict and low productivity
Explain the disadvantages of external growth
Culture clashes (people work in a different way)
Expensive
Demergers definition
The seperation of a larger company into 2 or more smaller companies
Explain5 reasons for demergers
To focus on the core business - Under-performing parts of the business are sold
To increase profit- may enable higher profits to be made by develeoping that part to gain the benefits of specialisation
To raise finance - selling shares in new company
To avoid diseconomies of scale
To meet demands of regulators (eg CMA - Competitors and markets agency) - increase competition
Explain the impact of demergers on Businesses
Benefits if increased specialisation leads to greater efficiency
But firms may lose some EOS, raising costs
Explain the impact of demergers on Workers
Some may gain promotion as a result of new roles being created
But some could lose their jobs- if each firm improves of efficiently its run
Explain the impact of demergers on COnsumers
Gain greater consumer surplus if firms more efficient as prices may be lower
Greater incentive for innovation through competition
But, no garuntee that prices will fall and could instead rise
