3.5 Firms Flashcards
3 ways to classify firms
Industrial sector they operate in
private or public sector (state-owned-enterprises)
Size or scale of production.
What is an industrial sector
3 industrial sectors
Contains firms that use similar production processes and specialize in the production of a similar range of products.
primary
secondary
tertiary
What is the primary sector
Extracts and uses natural resources of the Earth to produce raw materials, that are to be used by another business.
What is the secondary sector
Businesses in the secondary sector use the raw materials from the primary sector in order to produce the finished goods
What is the tertiary sector
Businesses in the tertiary sector sell the finished goods, from the secondary sector, directly to the consumer. They also provide services to businesses in other sectors.
How is the relative size of each of the industrial sectors measured in an economy
Number and size of the firms in each sector
Amount of resources the employ
Amount they produce.
What is the Private sector
Businesses that are owned and financed by private individuals with the aim to maximize profits.
Sole trader
owned controlled financed profits liability
Business that is owned, controlled and financed by 1 person.
That person receives all profits
but that person is personally responsible for any business debts.
Limited company
owned controlled financed (private vs public) profits liability
One or more shareholders
Shareholder(s) appoint one or more directors to run the company
Financed by the sale of shares to the shareholders.
a private limited company can only sell shares to private individuals
a public limited company can sell shares publicly through the stock exchange
Profits of the companies belong to the shareholders
Shareholders are not personally liable to any debts of the company.
Coorperative business
owned
controlled
financed
profits
Owned by members
Managed by a board of directors appointed by its members
Financed by member fees and draws on reserves
Members receive any surplus revenue that is not added to reserves
Charity
owned
controlled
financed
profits
cannot be owned but can be set up and registered by a pvt individual or another oragnization to provide beneficial services for public benefit
Run by a board of trustees
Gifts and donations from people and organizations
Don’t aim to make profit. Surplus income is reinvested into the charity to fund the services it provides
What is a SOE
full form
what they do
State-owned enterprise - Firm that is partially or wholly owned and operated by a government to carry out commercial activities in order to earn revenues and make profits to reinvest so that the goods and services can be improved or invested into other govt public sector projects.
How are SOEs funded
govts pay subsidies to their SOEs to reduce the cost of providing essential services and merit goods to people with low incomes who cannot afford them.
via tax
What is nationalization
Governments take ownership of private sector organizations.
eg: compulsory purchase of all shares in a private or public limited company.
What are the 3 size classifications of firms
Large
SMEs (small and medium enterprises)
Micro-enterprises
4 ways to measure the size of firms
How many workers they have
How they are organized
How much capital they employ
Their market share.
How many employees to be considered a small firm
how many to be considerred a micro-enterprise
why could it be misleading
up to 50 employees - small
up to 9 employees - microenterprise
some companies could be capitally intensive
How could organization be used to measure size
How many departments, and layers of the oraganization structure the firm has.
What is capital employed
why it could be misleading
Money invested in those productive assets in a firm that help it generate revenue.
could be misleading since some companies are labour intensive.
What is marketshare
why could it be misleading to measure size
Compares the proportion of total sales revenue of the firm to the total sales of the market
Could be misleading since the market sizes are different.
20% of a big market is better than 60% of a small market.
Why do firms remain small
market is small - the number of customers willing and able to buy the goods/services may be low so there may not be any point in expanding.
access to capital is limited - banks usually dont lend money to small businesses since they cannot put up any collateral, and may face fierce competition from larger rival firms which may lead to them not making enough revenue to repay loan and interest.
New tech has reduced scale of production needed
Business owners prefer to remain small - easier to control, don’t want the business to be very time consuming
How and why do govts encourage small firms
Small firms are innovative and could boost trade of other businesses as well in the future. If the firm becomes big it could generate wealth in the economy and create employment.
They encourage firms by:
providing grants to firms
subsiding costs
reduce the taxes on income
Advantages of a small firm
Can be set up easily - few legal requirements, can get grants from govts, can be run from home with little capital
Owners of firms are the main decision makers - highly motivated since they receive all profits, decisions are made quickly
Close contact with customers which can lead to more customer loyalty and feedback to improve or personalise products
can react to changes in economic and market conditions quickly - Can understand changes in customer trends and preferences quickly since they are in close contact with cusomters
don’t have significant amount of capital invested so they can change their production processes and products more easily as conditions change
Disadvantages of a small firm
Owners have full responsbility to run the business everyday - work long hours, do everything themselves (market, keep accounts, recruit, deal with customers/suppliers, etc)
lose revenue when they are sick or take a holiday.
higher chance of not surviving because -
lack financial resources
competition with many other firms
owners are personally liable in event of failure.
Find it difficult to raise capital and pay running costs to finance growth - banks and financial instituions don’t give loans easily, suppliers may be unwilling to supply to small firms because they may not be able to repay them, can’t sell shares
Average cost of delvering a product or service is usually higher for a smaller firm -
Smaller firms may be unable to buy in bulk and recieve bulk purchase price discounts from suppliers
Can’t afford specialist equipment and staff to increase efficiency
Internal growth
Grow organically, expand current business operations naturally.
External growth
Occurs, when a business takes over or merges with another business.
Takeover
When a larger business buys up all the shares of a smaller business without the agreement of the managers.
Merger
When owners of two businesses agree to combine their businesses in order to form one business.
Horizontal integrations
When a business takes over or merges with another business in the same stage of production and industry.
adv of horizontal mergers
What is consolidation
More market share
When the number of competitors is reduced due to a horizontal merger (consolidation)
May gain cost adv because of their combined sizes - economies of scale. This is because they can reduce the redundancies of staff (don’t need 2 finance departments, HR departments, etc) and they can receive discounts from suppliers for bulk orders.
disadv of horizontal mergers
Can become difficult to control and mange of a large number of workers.
Consumers - larger firms can restirct market supply and increase price and profits.
Vertical integrations
When a business takes over or merges with another business in the same industry, but at a different stage of production.
Forward Vertical integrations
When a business takes over or merges with another business in a later stage of production, in the same industry. Eg: Primary —> secondary, secondary —> tertiary. Primary —-> tertiary.
Backward vertical integrations
When a business takes over or merges with another business in a different industry altogether.
Adv of forward vertical mergers
adv of backward vertical mergers
Can tell the new business to not stock the products of rivals.
Assured regular and exclusive supplies from the new business.
can control the quality and costs of supplies from new business
Disadv of vertical mergers
Usually expensive
May require a different set of skills to run the business
Conglomerate integrations
When a business takes over or merges with another business in a different industry altogether.
Adv of conglormerate
Expand customer base
Allows companies to diversify its product range and reduce market risks if the demand of one of its good goes down.
Share ideas and innovations
achieve economies of scale - cost of R&D, advertising, etc is spread across the various businesses.
Disadv of conglorerate
May find it difficult to control a large firm with different businesses all selling to different groups of customers. can result in mismanagement and misunderstandings
Requires time and effort to understand the new business that is unrelated to the current business. Could lead to a loss of focus
Could be disputes between employees of various firms that are forced to work under 1 firm and culture.
