3.1.1 Sizes and Types of Firms Flashcards
What are the different types of firm?
What is a firm?
A business organisation such as a corporation that produces and sells goods and services in markets.
What is a not for profit organisation?
Businesses that are operated commercially but with social welfare and
environmental aims in mind. Typically, profits are reinvested for social purpose and social aims.
What is a public sector organisation?
Organisations that are owned and controlled by the state e.g. the NHS, social care,
state schools, the Police, HM armed forces. The NHS employs 30% of all UK public sector staff, with education
employing 28% of public sector staff.
What is a private sector organisation?
Private sector organisations are owned by private investors rather than the state.
84% of jobs in the UK are in the private sector.
What is a private limited company?
Corporations whose share are not listed on a public exchange. Examples include
McLaren Technology Group, JCB, Specsavers, Matalan.
What are co-operative producers?
Owned and run by their members. Examples include Arla Foods, Co-Op Group,
Richer Sounds, John Lewis / Waitrose.
What are social enterprises?
With a social enterprise, profit is reinvested for social purposes rather than for the gain of
private investors. Examples include: Housing Associations, the National Trust and university Student Unions
What are the majority of business registered as?
The majority of businesses registered in the UK are small or medium-sized enterprises (known as SMEs)
Why do many small firms survive?
- Many smaller businesses act as a supplier / sub-contractor to larger enterprises especially in the construction
industry and in sectors such as software coding / web design - They might take advantage of a low-price elasticity of demand and high income-elasticity for specialist ‘niche’
or ‘bespoke’ products that can be sold at a higher price with a large profit margin - Smaller businesses can avoid internal diseconomies of scale (rising long run average cost)
- Small businesses have benefitted from consumers willing to buy online – the barriers to entry into the market
have come down because of digital technology - Small businesses keep their over-head costs low e.g. a smaller full-time staff or relying on leasing equipment
Draw a table of business objectives and their relevance to smaller firms.
What are the key reasons to stay small?
- Product differentiation & having a USP (unique selling point)
- Flexibility in meeting customer needs
- Deliver a high standard of customer service
- Exploit opportunities from e-commerce
- Avoid risks of higher unit costs from internal diseconomies of scale (rising long run average cost)
- Smaller firms can be more innovative / creative and respond more quickly to changing market trends
Why is product differentiation a reason to stay small?
Positioning a business as small can help differentiate against larger competitors
Customer perception - may be an expectation of a better product from a business that “cares” More scope for adding value and charging a higher price through selling specialist expertise
Why would flexibility to meet customer needs be a reason to stay small?
- Many small businesses talk to their customers regularly; sometime every day
- Small firms often communicate in the customers’ language which give the impression to the customer that they are more in tune with their changing needs
- Makes it easier to get customer feedback (larger firms can struggle with this - a diseconomy of scale)
Why would being able to deliver a high standard of customer service be a reason to stay small?
- Most small businesses operate in the service sector, so this is a key source of competitive advantage
- Employees in smaller firms are likely to treat customer service as a priority (compared with larger firms) though there is no guarantee!
Why would being able to exploit opportunities from e commerce be a reason to stay small?
E-commerce is a common way for small firms to reach a broader customer base
It is now relatively easy for a small firm to target niche segments using e-commerce
Smaller firms can gain significant traction with customers using social media
What is a stakeholder?
A stakeholder is any individual or organisation who has a vested interest in the activities and decision
making of a business
What is a shareholder?
Shareholders:
* Own the business – they have an equity stake in the business - perhaps a founder
* May also work day-to-day in the business
* Mainly interested in growing the value of their shareholding
What is capital gain?
an increase in the market value of a share
What are dividends?
a share of the profits made by a business
Draw a table of stakeholders and show what they would be mainly interested in
Draw a table of potential conflicts between shareholders
What is the divorce between ownership and control?
The divorce between ownership and control means that the people who own a company are different from those who manage it. This can lead to conflicts of interest and different priorities between the owners and the managers.
What is the principal agent problem?
The principal agent problem is an asymmetric information problem. Owners of a firm often cannot observe directly
the day-to-day decisions of management. The decisions and performance of agent are costly and difficult to monitor.
Explain what happens in a principal agent problem
- Principal - Owner of the business i.e. has a significant equity stake
- Hires an agent - e.g. sales or finance manager
- Managers - May have different business objectives to the principal, such as revenue maximisation instead of profit satisficing
How can businesses overcome the principal agent problem?
- Employee share ownership schemes - John Lewis and Waitrose have a well-regarded partnership model
Stock options might lead to perverse behaviour - e.g. deliberate attempts to hike up share prices through illegal action (think back to the notorious case of Enron) - Long term employment contracts for senior management - Security of tenure might encourage managers to take pricing and investment decisions in the longterm best interests of the business
- Long term stock commitment - Apple requires senior executives at Apple to hold three times their annual base salary in stock, and executives have to keep this salary in stock for a minimum of five years to satisfy the requirement
What are examples of public sector organisations?
- British Nuclear Fuels plc.
- Network Rail
- Royal Bank of Scotland
- Met Office, Ordnance Survey
- Nuclear Decommissioning Authority
What is privatisation?
Privatisation means the transfer of assets from the public (state or government) sector to the private sector
of an economy – privatisation causes a change of ownership
What happened to UK’s public sector after privatisation?
- In the UK, the process has led to a reduction in the size of the public sector.
- State-owned enterprises in Britain now contribute less than 2% of GDP and 1.5% of employment.
What are key examples of privatisation in the UK over the years?
- British Aerospace (1980)
- British Airways (1987)
- British Coal (1994)
- British Gas (1986)
Explain what happens in producer cooperatives
- Co-ops are owned and also run by their members, who can be customers, employees or groups of businesses.
- The supermarkets-to-funerals Co-op Group is the biggest, followed by John Lewis Partnership, the retailer.
- Farmers’ co-ops are also popular in the UK. Other co-ops include community pubs, supporter-run football
clubs and foster care and local childcare providers. - These businesses are run on principles of shared ownership, shared voice & shared profits.
Explain how the Network Rail acts as a not for dividend company
- Network Rail’s purpose is to deliver a safe, reliable and efficient railway for Britain
- It is a company limited by guarantee - whose debts are secured by the government
- Network Rail is a “not-for-dividend” company - profits are invested in the network.
- Train operating companies such as First Great Western and Virgin Trains pay Network Rail for use of the rail intrastructure when running services
- Network Rail is given targets for punctuality and safety by the Rail Regulator
