3.1.1 Sizes and types of firms Flashcards
LS1
Why do firms seek growth?
- Profit
- Costs
- Market power
- Diversification
- Managerial Objectives
How does increasing firm size lead to increased profit?
- Increasing size enables firms to sell more goods and services
- Leads to increase in sales, which leads to higher revenue = higher profit
Profit beneficial to firms in several ways (increased investment)
How does increasing firm size lead to lower unit costs?
- Firms that increase in size often experience lower unit costs as a result of economies of scale
Beneficial as lower unit costs allow for higher profit
How does increasing firm size affect market power?
- The larger a firm becomes, the more market power they will have
Market power definition?
- The ability of a firm to raise prices and earn supernormal profit
Diversification definition?
- Increasing the range of products or markets served by a business
Degree of diversification depends on extent to which the those products/markets are diff to existing products/markets served by the business
How does increasing firm size lead to diversification?
- Firm can expand in size through entering a foreign market (like German firm Lidl opening its first UK store in 1994)
- OR by producing a new good/service (like Amazon providing groceries now)
How can diversification be beneficial to firms?
- Reduces risk
- Reduces vulnerabilities to recessions (if operating in multiple countries)
How do managerial objectives give firms a reason to seek growth?
- Managers often have renumeration packages that are determined by sales performance of their firms (like a CEO receiving bonuses for meeting sales targets)
- Managers may also seek to increase firm size to satisfy their ego (i.e. leading a large firm can command respect from others)
Why do some firms choose to be small?
- Worried about experiencing diseconomies of scale if they expand
- Firm’s owners may not want the extra work and risks (expansion involves sunk costs that can’t be recovered if expansion is a FLOP like the money lost on marketing, capital, labour etc)
- Smaller firms generally face less, more easily compliable regulations than larger firms so staying small can allow for a more manageable regulatory framework for firms
Why must some firms remain small?
- Unable to finance expansion as banks generally see small firms as risky borrowers
- Operate in niche market with small customer base (i.e. yachts)
- Skills, knowledge and expertise (human capital) required may be lacking
- Firms may lack the resources to cope with additional regulations and bureaucracy that expansion entails
Private sector firms?
- Firms not owned by the government
- May be owned by shareholders (PLC like M&S)
- Or family owned where shares are not traded on the stock market (like LEGO)
- Includes sole proprietors (owned and run by one person like a newsagent)
What is the aim of private sector firms?
- To make a profit to satisfy the demands of their owners
Public sector?
- Consists of government-controlled enterprises that run on the basis that it will not make profit for shareholders but instead will reinvest any surplus funds
For UK: NHS, Network Rail
Why does the government own certain businesses?
- Either because they could not survive without significant state funding
- OR because government wishes to determine the direction the business takes
Not-for-profit sector?
- Consists of charities which exist to provide services to local, national and international communities and do not see profit as the primary goal
Sometimes known as the third sector or civil society
What is the principal-agent problem?
(Divorce of ownership from control)
- An asymmetric information problem
- Where agents (e.g. managers) behave in a way that conflicts with the objectives of the principal (e.g. owners of a firm)
e.g. Antony Jenkins sacked for not cutting costs and increasing profit fast enough for Barclays 2015