3.1) business growth Flashcards
define a firm?
an organization that brings together factors of production in order to produce output
what is the private sector
made up of firms that are privately owned
what is the public sector
made up of state owned organizations, including those that run central and local government activities and some enterprises in public ownership
what are the aims of the private sector firms?
maximize profits on most part, some do not such as charities
what are the aims of the public sector firms?
maximize efficiency
define organic growth?
when firms grow internally by reinvesting profits or by borrowing from the banks
what is the advantage of diversifying
diversification allows you to reduce risk as it means goods don’t follow same cycle, less prone to a decrease in revenue of one product
what are the disadvantages of diversifying?
firm may be inexperienced in the new market (depends on quality of management team)
what is a horizontal merger?
a merger with two firms in the same industry and same stage of production- two car assembly lines
what is a vertical merger?
a merger with two firms in the same industry at different stage of production- tire producer and car assembly line
what is a conglomerate merger?
a merger with two firms in different markets
what is the effect of globalisation on growth?
larger potential for growth due to larger markets, more competively priced resources
what is the pros of a horizontal merger?
instant access to economies of scale, more market power.
what are the pros of a vertical merger?
greater control over supply chain, less subject to interruptions in supply due to not relying on another firm, more control on the margins at each stage of production.
what are the pros of a conglomerate merger?
diversified portfolio ( less vulnerable to a recession), cost savings if they can find links between company (accounting)
what is rationalisation?
the reorganisation of a company in order to increase its operating efficiency
what are the cons of a horizontal merger?
attract attention of regulators
what are the cons of a conglomerate merger?
managerial diseconomies of scale if managers don’t understand all aspects of new business
what are 5 constraints on growth?
1) size of market- firm operating in niche markets have
limits on size it can grow to.
2)type of markets- localized markets have limited
scope for expansion - hairdressers have local and
loyal clients
3)firms aims- some may want to stay small- owner
wants to keep sole control over business
4)access to funds- small companies may be limited to
own resources
5)regulation by government to restrict damage to
consumers
what is the principle agent problem?
a problem arising from conflicting objectives of principles and agents who make decisions on their behalf.
where does the principal agent problem usually arise?
large publicly owned companies.
what are the shareholders aims?
maximise their profits
what are managers aims?
doing just enough work to satisfy shareholders, leads to profit satisficing ( aim to make satisfactory profits)
why does the principal agent arise?
asymmetric information between agents and principals
