6EC03 - Firms Flashcards
What is an industry?
Collection of firms operating in same production process
What is a firm?
A production unit (transforms resources into goods & services)
What is the private sector?
Involves assets owned by individuals or groups, not the government
e.g Bupa hospital, funded by private payments from individuals or companies
What is the public sector?
Involves assets owned by society as a whole, provided through the government
e.g NHS hospital, funded mainly through taxation
How do firms grow?
1) Internal/ Organic growth
2) External/ Inorganic growth (takeovers)
What is internal/ organic growth?
Simply where firms increase their output,
Increasing existing production capacity through investment,
Development and launch of new products,
Finding new markets (exporting)
Increasing customer base (marketing)
List the 3 main ways a firm can grow.
1) Horizontal integration
2) Vertical integration
3) Conglomerate integration or diversification
What is horizontal integration?
Firm joins another at the same stage of the production process
e.g lloyds tab & halifax bank of Scotland or t-mobile & orange both in 2009
What are the benefits of horizontal integration?
Increased market share,
Leads to internal economies of scale,
Reduced competition
What are the costs of horizontal integration?
Unknown costs,
Loss of jobs
What is vertical integration?
Where one firm joins with another at a different stage of the same production process e.g eBay taking over PayPal
What is forward vertical integration?
Firm buys up a firm nearer the customer e.g a distributor american apparel buying design components
What are the benefits of forward vertical integration?
Greater access to customers,
Removal of competing suppliers,
Better market knowledge
What are the costs of forward vertical integration?
Lack of expertise,
Over exposure,
High start up costs,
Dilution of brand
What is backward vertical integration?
Where a firm buys up a supplier,
Guarantees suppliers or access to the market e.g Miller yoghurt taking over a dairy farm
What are the benefits of backward vertical integration?
Assured supplies,
Widening expertise,
Increased market share
What are the costs of backward vertical integration?
Lack of expertise,
Over-exposure
What is conglomerate integration?
Where a firm buys up anther firm in a different industry,
e.g Richard Branson at Virgin: airplanes, wifi, trains, telecoms or cigarette company buys up chocolate company
What are the benefits of conglomerate integration?
Greater spread of risk,
Widening range of output to reduce expedite to any one market,
Allows firms to use funds to cross-subsidise investment in new areas takes chance to innovate without losing revenue,
Increase job security,
Widens brand awareness
List 8 reasons firms grow.
1) Increased market share
2) Benefit from greater profits
3) Increase sales
4) Increase economies of scale
5) Gain power
6) Satisfy managerial ambitions
7) Gain expertise
8) Make the most of an opportunity
What are the benefits of growth?
Economies of scale - firm able to exploit its increased she and approaching minimum point of LRAC so firms moving closer to productive efficiency
Increased market share - become dominant firm in particular industry allow to increase profits or ensure in stronger position to dominate market it set prices to their benefit
Economies of scope/ reduce risk - larger firms less exposed to risk that firms may have if narrowly focused especially in recession
Psychological factors - managers may gain more job satisfaction from working for well-known brand or working for more people responsibility etc
Why do some firms break up/ demerger?
Lack of synergies - one part of firm having no impact on the more efficient/ profitable part of the firm
Diseconomies if scale - growth of output managers may lose focus & control over day-to-day management so LRAC increase
Price - the merged firms price might be higher than price of single larger firm e.g on a stock exchange
What are mergers, amalgamations, integration or takeovers?
The joining together of 2 or more firms under common ownership
What is synergy?
When 2 or more activities or firms put together can create greater outcome than the sum of the individual pars (2 + 2 = 5)
What is a demerger?
When a firm splits into 2 or more independent businesses
e.g ‘Fosters’ Australia’s best-selling larger after 15 years with treasury wine estates demerged in 2011
Why do some firms remain small?
Niche market - some firms operate in v.small corners of market because demand for product is specialised & limit
Lack of economies of scale - sometimes say firm has a small minimum efficient scale e.g doctors dentist can only operate certain caseload therefore small practice
Need for dynamic, responsive, service-led firm - firms involved in design small & quick to respond to need of larger firms who buy their services
Heavy government regulation - government wants to prevent monopolies developing e.g commercial banks in the US.
Lack of resources - firm may lack knowledge, expertise or funds to expand
Lack of motivation - satisficing
Avoiding attention from potential buyers - growth and increased profits may result in unwanted overtures from larger firms wishing to buy out sole trader
Tax thresholds - get access to additional training grants from government, not liable for corporation tax if profits below £10,000
What are barriers to entry?
Obstacles that prevent a firm setting up, or extending its reach into new markets
What are barriers to exit?
Any factors which prevent firms leaving a market,
Or make it more unprofitable to leave than stay in business, even if operating at a loss,
e.g sunk costs
What are legal barriers?
Government may prevent entry or growth of a firm,
Patents - will also give firms legal protection to ensure ideas or processes are protected from competition,
Licences - needed for some industries before firm or industry can operate e.g law
What are marketing barriers?
Those imposed by businesses currently operating in an industry,
Branding or advertisement,
Investment in marketing cannot be recouped if campaign fails: sunk costs
What are pricing barriers?
Limit pricing
Predatory pricing
What are technical barriers?
Often only few firms dominate industry thanks to their size,
Smaller & newer firms unable to compete with larger firms as they’re able to use their knowledge & expertise to produce goods & services at lower cost,
New firms find impossible to compete as AC will be much higher
What are sunk costs?
Costs of production which are not recoverable if a firm leaves the industry
