3.1.1 - Sizes & Types Of Firms

Question 1

Why Do Firms Grow?
(6 Points)

Answer 1

~ Desire for higher profit, which motivates firms.

~ Desire for stronger monopoly power to influence prices and restrict others from entering the market.

~ Benefit from EOS to reduce costs.

~ Satisfaction of growing.

~ Opportunities for product diversification and ability to sell more.

~ Larger a firm the easier the access to finance.

Question 2

Why Do Some Firms Remain Small?

Answer 2

Due to constraints on growth.

Question 3

What Are Barriers To Business Growth?
(6 Points)

Answer 3

~ Regulatory barriers (CMA), as they can block mergers preventing growth.

~ Financial funding constraints, hard to find funding especially when firms aren’t listed.

~ Finding or training skilled staff.

~ Size of the potential market.

~ Disruptive technologies, disturbing growth due to new tech.

~ Controlling the cost of a growing business.

Question 4

Why Do Some Firms Choose Or Have To Remain Small?
(5 Points)

Answer 4

~ Offer a more personalised service, focusing on building relationships with their customers.

~ Unable to access finance for expansion.

~ Provide a product that is in a niche market / smaller market.

~ Rapid growth can cause DEOS.

~ Owners goal is to profit satisfice.

Question 5

Describe Divorce Of Ownership & Control
(3 Points)

Answer 5

~ As firms grow, owners (Shareholders) often appoint managers to run the business for them.

~ There is a separation (Divorce) between the owners and the managers who control the day to day running of the business.

~ The divorce gives rise to the principal-agent problem.

Question 6

What Is The Divorce Of Ownership & Control Caused By?
(3 Points)

Answer 6

~ Differing aims of the 2 stakeholders, owners and managers.

1) Owners want to maximise the returns on their investment, therefore short run maximising.

2) Directors and managers are unlikely to want the same thing, as employees they will want to maximise their own benefits.

Question 7

Describe The Principl-Agent Problem
(4 Points)

Answer 7

~ Asymmetric information problem that stems from the divorce of ownership and control.

~ Is when one group (Agent), makes decisions on behalf of another group (Principal).

~ Problem is worsened by information gaps, agents have much more information than the principals.

~ Leads to poor decision making by the owners as their aims and objectives may not align with what the managers are aiming towards.

Question 8

How Can Firms Overcome The Principal-Agent Problem?
(3 Points)

Answer 8

~ Employee share ownership, if employees are shareholders they would align interests with the owners.

~ LT contracts for managers, so that they end up making decisions in the firms LT interest.

~ Increase business transparency, leading to clearer decisions.

Question 9

Describe Private Sector Organisations
(3 Points)

Answer 9

~ Runned and owned by private individuals. E.g. Sole traders and PLCs.

~ Goal is to profit maximise, this sector tends to have more efficiency with higher levels of productivity.

~ E.g. Virgin

Question 10

Describe Public Sector Organisations
(3 Points)

Answer 10

~ Owned and controlled by the state (Government).

~ Their goal is not profit maximisation, but to provide a service.

~ E.g. NHS.

Question 11

Describe For Profit Businesses
(3 Points)

Answer 11

~ Mostly operate in the private sector. E.g. Sole traders, partnership, PLCs and LTDs.

~ Aim is to often make a profit for the owner.

~ Considered good for the economy, as the profit incentive drives efficiency, innovation and competition.

Question 12

Describe Not For Profit Businesses
(4 Points)

Answer 12

~ Designed to not make a profit, are run on commercial lines.

~ Exist to provide a service or to meet a need.

~ They use their profits they generate to further their objectives. E.g. The British Heart Foundation.

~ E.g. Charities, network rail.