36 - Growth and Survival of firms

Question 1

Reasons why small firms exist

Answer 1

• The demand/market not enough to support a big firm
• Entreprenure doesn’t want to lose control and have other prioritiese than expansion – social enterprise
• Services: where personalised attention is needed
• Not enough workers with the required skills and qualification
• Acess to information and technology has increased in the digital world
• The government provides schemes as they create job and possibility of local growth
• Obstacle to growth - financial credibility and high fixed costs
• Self employed during recsiion and unemployment

Question 2

Motives behind the growth of a large firm

Answer 2

• Economies of scale
• Economies of scope
• To achieve bigger market shares
• Asset stripping

Question 3

What is Asset Stripping

Answer 3

When firms purchase an undervalued company that doesn’t utilise all of it’s resources and then separately sales it’s assets. This is beacuse sum of parts sold separately is greater than the valuation. The money earned from sales can be used to improve the main business.

Question 4

Explain Economies of Scope and why big frims want it

Answer 4

Economies of scope allows a firm to diversify it’s product range. It helps spread the risk. If a particular business declining revenue from other businesses can be used. It also allows the entreprenuer to take advantage of related business oppportunities.

Question 5

Why to big firms want to acheive a greater market share

Answer 5

• Only big firms can compete in the long run when MNCs are involved
• Boost sales revenue and profits

Question 6

3 ways in which a firm grows

Answer 6

• Internal growth
• External growth
• Diversification

Question 7

Economies of scale

Answer 7

• Reduce long run average cost
• Allows to reduce price without cutting profits
• mergers + bulk purchasing + joint distribution gives the firm a competitive edge

Question 8

What is internal growth

Answer 8

• Firms reinvest some of thier profits in the business usually capital intensive
• Happens during economic boom
• Short run
• Greater risk

Question 9

What is external growth

Answer 9

• Exapnsion by takeovers or mergers
• During a recession as there is excess productive capacity
• Involves less risk, easier quick + cheaper

Question 10

Diversification

Answer 10

Whena firm grows through the production and sales of a variety of differnt products.

spreads risk, allows to exploit an opportunity

TATA Group, Nestle, Reliance

Question 11

Horizontal Integration

Outcome
Motive
Benefits
Limitations

Answer 11

Where a firm mergers with or acquires another firm in the same line of business.
Outcome - Expansion
Motive - Economies of Scale
R and D, marketing cost reduced, increased market power, reduced competition –> Abnormal profits

• Government may restirct to avoid abuse of monopoly power.

Question 12

Vertical Integration

Benefits
Limitations

Answer 12

Firm grows by producing backwards or forwards in its supply chain.
- Improved security and quality of supply
- reduced supply costs
- higher costs if not efficient

Question 13

Conglomerate

chracteristic
limitation

Answer 13

growth by purchasing unrelated businesses to spread the risk.
- Each board has different set of directors
- TATA Nano – Failed, profit from other firms were used.
- Difficult to strategically manage

Question 14

The principle agent problem

Example

Answer 14

Occurs when agent makes decision on behalf of the principal.
- Agent has day to day involvemnet + more information
- Can have a clashes in interests.