5: Business Behaviour Flashcards
Demergers
a business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be disolved i.e. 1997 Pepsi announced a demerger of its deals with Pizza Hut, KFC and Taco to focus on competition with Coca Cola
Why do you demerge?
Lack of synergies
Value of company/share price
Focussed companies
Impact of a demerge on the business
Efficient
Innovation
Higher survival chance
Less economies of scale
Impact of a demerge on workers
Lead to promotions
May result in job loss due to aim of being more efficient
Impact of a demerge on consumers
Efficiency + innovation = better products + cheaper prices
Less efficient due to economies of scale = raised prices/reduced quality of goods due to motivation for profits
Total revenue =
Price x Quantity
Average revenue =
Total revenue / Quantity
Marginal revenue (defintion and formula) =
Additional revenue gained by a firm from selling an additional unit. Change in TR / Change in output
Profit =
Total revenue - total costs
Agent of a firm
A person, company or organisation that has na influence on an economy by producing, buying or selling
Divorce of ownership and control
When an owner of a business does not control and does not get involved in the day to day running of the business
Not-for-profit organisation
Establishments that are used for the welfare of the community and people
Public sector organisation
Provide goods/services for the community and owned by the government
Private sector organisation
Owned by individuals and are driven by profit
Seperation of ownership and control
When shareholders possess little or no direct control over management decisions
Co-operative type of firm
Business/organisation that’s owned and controlled by its members to meet shared needs i.e. co-op supermarket or co-op bank
Partnership type of firm
Two or more people oversea business operations and share profits and liabilities i.e. RedBull + GoPro
Privately owned firm (LTD)
Owned by a closed circle of shareholders who can’t sell shares to external investors i.e. local retailers
Public Limited Company (PLC)
Can sell shares on the stock market i.e. Amazon
Social Enterprise (not for profit)
Puts interests of the people above prodit i.e. cooperative
Start up business
A company in the first stages of operation i.e. AirBnB or dropshipping
State-owned business
An entity formed by the government for the purpose of engaging in commercial activities i.e. British Buiness Bank
Why do firms seek to grow?
Increase market share
Lower costs through economies of scale
Generate more revenue
More sales
Maximise profits
Why do some firms remain small?
Owner’s decision
Nature of the product
Avoid diseconomies of scale
Limited production capacity
Small target market
Principal agent problem
The conflict in interests and priorities that arises when one person or entity takes actions on behalf of another person or entity
Ways a corporation can overcome the principal agent problem
Full transparency
Align the interests of the both principal and the agent
Remove any conflicts of interest
Backward/forward vertical integration
A company expands to fufil a role behind them/infront of them in the supply chain i.e. a brewer buys a hop farm or a vehicle manufacturer buys a car retailership
Pros of vertical integration
Control of supply chain -> reduces costs + improves quality
Improved access to raw materials
Cons of vertical integration
Loss of focus
High costs
Less flexibility
Organic growth
Increasing capital and enhancing sales internally
Pros of organic growth
Lower risk
More sustainable
Cons of organic growth
Can be slower
Growth may limited
Horizontal integration
Acquisition of another company in the same industry i.e. Facebook with Instagram
Pros of horizontal integration
Expands market share
Grow in revenue
Improved efficiencies
Cons of horizontal integration
Less flexibility
Regulatory scrutiny
Conglomerate integration
A merger between two firms in different industries i.e. Amazon and Whole Foods
Conglomerate integration pros
Diversification
Expanded customer base
Conglomerate integration cons
Clashing cultures
Loss of efficiency
Shift away from core business
External growth
A merger/takeover happens to a business by a third party that results in increased investment
How can smaller firms survive and remain profitable in markets with bigger scaled businesses?
More flexible
Fill niches
Social profiles with customers
Factors that act as a constraint on business growth
Size of the market - demand limited in small/niche markets
Access to finance - hard to expand with difficulty in getting loans and raising capital
Owner objectives - some owners want to remain small
Industry regulation - may introduce costs
Activist shareholders
Uses an equity stake in a corporation to put pressure on its management
Performance-related pay
Linkign salaries to individual based performance
Stakeholder conflict
Interests/goals of stakeholders clash
Rationalisation
Changing a pre-exisitning workflow into one that’s more goal orientated and based on a specific set of rules
Marginal productivity
The amount produced by each additional worker. Change in output / change in workers
What happens if marginal productivity falls?
Marginal costs will rise
Economies of Scale
Reducing average total costs as output increases
Economies of scale Fun Mums Try Making Pies??
Financial - large firms negotiate cheaper finance deals
Managerial - use of specialists
Technical - changes to ‘productive process’
Marketing - expensive marketing spread over lots of sales
Purchasing - able to buy in bulk
Diseconomies of scale
The average cost of production increases as output increases
External economies of scale
Cost savings outside of a firm but within an industry i.e. better transportation network
Minimum efficiency scale (MES)
Minimum level of output needed for a business to fully exploit economies of scale
At what point is profit maximisation on a monoply diagram?
MR = MC
At what point is revenue maximisation on a monoply diagram?
MR = 0
At what point is sales maximisation on a monoply diagram?
ATC = AR
At what point is satisficiny on a monoply diagram?
Triangal between profit max and sales max
