3.1 - Size and Types of Firms Flashcards
Give one reason why a firm should grow.
A firm should grow as it can gain many profits, impressing shareholders who now get a higher return.
Give another reason why a firm should grow.
A firm should grow due to lower costs, as it can benefit from economies of scale, where there are low unit costs.
Give a third reason why a firm should grow.
Higher market power: the firm has the potential to dominate the market it is operating in, and get the most market share which allows it to set high prices.
Barrier to growth of firm 1
As a firm grows, it issues shares of profit to potential shareholders, but if this is excessive then it may result in a loss of control of the firm.
Barrier to growth of firm 2
Diversification of a firm into too many different industries/markets may lead to a lack of focus, as it will be difficult to allocate enough time to each different industry.
Barrier to growth of firm 3
Owners of small firms that offer personal services, like your local nail salon or barber, will find it difficult to continue offering these services if they expand operations.
Describe the divorce of ownership from control.
This is a principal-agent problem, where the shareholders, who own the firm yet appoint directors and owners to run the business on their behalf, have differing objectives from the managers. The managers wish to maximise sales at the expense of profits
What is organic growth?
Organic growth is where a business grows through reinvestment of profits and borrowing from banks.
How does this organic growth come about?
Organic growth comes about when a firm expands operations, employs new workers, investing in technology or capital…
Give two forms of external growth (integration).
Merger, or takeover (acquisition)
What is a merger?
A merger is where two businesses make a mutual decision to combine and become one entity.
What is a takeover (acquisition)?
A takeover is where a larger firm takes over a smaller firm, with no mutual decision.
What is vertical integration?
Vertical integration is where two firms from the same industry, join together in different stages of the production process.
What is horizontal integration?
Horizontal integration is where two firms from the same industry, join together in the same stages of the production process.
Define conglomerate integration.
Conglomerate integration is where two firms join together from differing industries.
