Business growth

Question 1

types of firms

Answer 1

public limited companies - companies listed on the stock market eg tesco

privately owned - limited liability, shares are privately held and traded, eg JCB

startups - newly created businesses

state owned businesses - businesses operating in the public sector, government has significant/majority shareholding, eg network rail

social enterprises - commercial businesses whose profits are reinvested for social projects, eg Ian project in cornwall

cooperatives - each member of the business has equal stake

partnership - employee owned firms, john lewis

Question 2

sizes of firms

Answer 2

1- 9 = micro business
10-250 = SME (small to medium)

Question 3

why is profit maximisation the objective for firms

Answer 3

• reinvestment - large profits means they can reinvest into the business, could be in the form of capital, R&D
• to pay greater dividends to shareholders
• to reduce costs and allow lower prices for consumers (profit = rev - costs)
• to reward entrepeneurship

Question 4

who are shareholders

Answer 4

owners of a company

Question 5

when does profit maximisation occur

Answer 5

when MARGINAL COSTS = MARGINAL REVENUE

Question 6

why does profit maximisation occur at MC = MR

Answer 6

• any point to the right means that costs are higher than revenue, reducing profit
• any point to the left is bringing in profit, but not the maximum amount, as any extra unit would generate more profit

Question 7

why might businesses choose not to profit maximise

Answer 7

• Firms may not have accurate information about where MC = MR, making it difficult to identify the profit-maximizing point.
• to avoid scrutiny - limit profits to avoid government regulation or public scrutiny, especially in industries where high profits might attract negative attention or accusations of monopolistic behavior
• key stakeholders being harmed - firms may not maximise profit if it harms key stakeholders, such as employees, customers, or suppliers, to maintain good relationships, ensure long-term sustainability, or avoid negative public perception.
• Businesses may not profit maximize due to the principal-agent problem, where owners’ interests differ from managers’.
• ## Owners focus on profit, while managers may prioritize job security or growth, leading to decisions that favor sales over profits.

Question 8

what is profit satisficing

Answer 8

making just enough profit to keep shareholders happy

Question 9

what is a stakeholder

Answer 9

any person who has an interest in how the business is running

Question 10

examples of stakeholders

Answer 10

• shareholders
• managers
• consumers
• workers
• govt
  environmental groups

Question 11

which of the stakeholders may be negatively affected because of profit maximisation

Answer 11

consumers - raising prices to increase revenue can lead to consumers paying more for goods and services
- To reduce costs, firms may cut corners on product quality, leading to inferior goods for consumers

• workers/trade unions - Firms may keep wages low to minimize costs and maximize profits, which can hurt workers’ earnings.
  
  • might reduce staff or automate jobs to cut labor costs, leading to layoffs or increased job insecurity.
  • To reduce expenses, firms might cut spending on employee benefits, safety, or training, leading to poor working conditions

government - Profit maximization can lead to wage disparities and wealth concentration, increasing income inequality

environmental groups - Profit-maximizing firms may cut corners on environmental protection measures, leading to higher pollution and resource depletion.

Question 12

why is it bad to harm certain stakeholders

Answer 12

• Consumers: Harmed consumers may lose trust in the firm, leading to decreased sales and brand loyalty.
• Workers/Trade Unions: Unhappy workers can lead to lower productivity, strikes, or high turnover, affecting business operations.
• Governments: Poor relations with governments can result in stricter regulations or penalties, increasing costs for the firm.
• Environmental Groups: Negative environmental impacts can damage the firm’s reputation, leading to boycotts or costly legal actions.

Question 13

why might companies want to maximise revenue

Answer 13

• By maximizing revenue, companies can increase output, potentially lowering average costs due to economies of scale.
• Lower production costs can increase competitiveness, allowing the firm to price more competitively or increase profit margins.
• Revenue maximization may support predatory pricing strategies to outlast competitors by temporarily reducing profits.
• By driving rivals out, a firm can eventually increase its market power and potentially raise prices.
• Principal-Agent Problem
• Revenue growth can align with managers’ goals, who may be motivated by bonuses or promotions tied to revenue targets, even if not profit-maximizing.
• This can result in decisions that prioritize scale and visibility, though it may conflict with shareholders’ desire for profit maximization.

Question 14

what is predatory pricing

Answer 14

when a firm will undercut its rival on purpose, sacrificing profit to do so, in order to drive out competition

Question 15

when does revenue maximisation occur

Answer 15

when MR = 0

Question 16

when is there sales maximisation

Answer 16

when AC = AR

Question 17

why might firms want to maximise sales

Answer 17

economies of scale:
- By maximising sales, firms increase their production levels, which can lead to lower average costs per unit due to bulk purchasing and operational efficiencies.
- can enhance competitiveness and improve profit margins in the long run as fixed costs are spread over a larger output

• limit pricing:
• Firms may set prices low enough to maximize sales and deter potential competitors from entering the market by signaling that they cannot sustain profitability at higher prices.
• established firms can maintain market dominance and reduce the threat of new entrants

3. Principal - Agent problem:

• Managers might prioritize maximizing sales to demonstrate business growth, which can lead to performance bonuses or job security, regardless of the firm’s profitability.
• This behavior can result in a focus on immediate sales growth rather than long-term profit maximization, which may not align with shareholders’ interests.
• Flooding the market:
• Firms might aim to maximize sales by flooding the market with products to increase brand visibility and consumer recognition.
• A strategy focused on high sales volume can generate significant cash flow, which can be reinvested into the business for future growth.
• By saturating the market, firms can limit the space available for competitors, effectively reducing competition and establishing stronger market control.

Question 18

other objectives of firms

Answer 18

1. Survival;
   - In highly competitive or volatile markets, firms may prioritize survival over profit to endure fluctuations and avoid bankruptcy.
   
   • Firms may adopt a survival strategy during challenging economic conditions to navigate short-term obstacles, aiming for sustainable practices that ensure their future success.
2. societal interest
   
   • Firms may aim to maximize societal interests to enhance their reputation and brand loyalty, attracting consumers who value ethical practices.
   • firms can foster long-term sustainability,
   • Focusing on societal interests helps build positive relationships with stakeholders, including customers, employees, and regulators, which can lead to increased support and reduced conflict.

Question 19

when are societal interests maxed

Answer 19

when P = MC

Question 20

why might a firm choose to maximise corporate social responsibility

Answer 20

• By maximizing corporate social responsibility (CSR), firms improve their public image, attracting customers who prefer to support socially responsible companies.
• Focusing on CSR helps firms anticipate and mitigate risks related to regulatory changes and public backlash, leading to greater long-term stability.
• Firms that prioritize CSR can enhance employee morale and retention, as workers are often more motivated to contribute to an organization that aligns with their values and promotes social good

Question 21

what is profit

Answer 21

total revenue - total costs

Question 22

what are included in total costs

Answer 22

• physical / explicit costs (fixed and variable costs)
• implicit costs such as opportunity cost

Question 23

difference between how economists view profits and how accountants view them

Answer 23

• economists consider both implicit and explicit costs
• accountants only consider explicit costs

Question 24

what is normal profit

Answer 24

the minimum level of profit required to keep factors of production in their current use

Question 25

what does subnormal / loss mean

Answer 25

when economic profit is lower than normal profit, when the profit being made is not enough to cover the opportunity cost of production

Question 26

what is supernormal profit

Answer 26

• any profit that is made above normal profit

Question 27

condition for normal profit

Answer 27

AR = AC

Question 28

condition for supernormal profit

Answer 28

AR > AC

Question 29

conditions for subnormal profit / loss

Answer 29

AR < AC

Question 30

what is revenue

Answer 30

the money made from sales by a business
Price x quantity

Question 31

what is average revenue

Answer 31

• total revenue / quantity
  (so price)

Question 32

what is marginal revenue

Answer 32

• change in total revenue / change in quantity

Question 33

characteristics of a perfect competition market

Answer 33

• many buyers and sellers
• firms sell homogeneous goods
• firms are price takers - they dont set price
• no barriers to entry or exit
• perfect information

Question 34

when MR = 0 , why is total revenue maximised

Answer 34

• marginal revenue shows the additional revenue from selling one more u it
• when MR = 0, total revenue is maximised since no extra revenue is gained from selling more
• beyond MR = 0, TR is negative as more units are sold at lower price

Question 35

What is vertical integration

Answer 35

• is business strategy where a company expands its operations by acquiring/controlling other businesses that are either upstream or downstream in the supply chain

Question 36

what is forward vertical integration
what is backward vertical integration

Answer 36

forward - an integration of business that is closer to final consumers. eg shell buying first utility

backward - business integration that is closer to the raw materials in the supply chain

Question 37

advantages of vertical integration

Answer 37

• greater control of the supply chain , helps reduce costs and also improve the quality of inputs , reduces dependence on third party suppliers
• improved access to key raw materials - by controlling suppliers, firms can secure a reliable and cost effective supple of essential raw materials , reducing the risk of price fluctuations and shortages
• removing suppliers/ gaining market intelligence- by aquiring suppliers, firms can reduce competition and gain valuable market insights, helping to innovate and respond better to market changes and customer demand

Question 38

disadvantages of vertical integration

Answer 38

Coordination Challenges:

Managing multiple stages of production and distribution can be complex and inefficient, leading to communication breakdowns and operational difficulties.(dEOS)

Increased Control, but Less Flexibility:

While vertical integration offers greater control, it can reduce flexibility, making it harder for firms to switch suppliers or adapt quickly to market changes.

High Capital Costs:

Vertical integration often requires significant investment in acquiring new businesses or assets, which can strain a company’s financial resources.

Reduced Focus on Core Competencies:

Diversifying into different stages of the supply chain may distract firms from their core business, leading to inefficiencies and reduced performance in their primary area of expertise.

Regulatory Risks:

Vertical integration can attract regulatory scrutiny, especially if it leads to anti-competitive practices or market dominance, which may result in legal challenges and fines.

Question 39

What is horizontal integration?

Answer 39

joining/aquiring between two businesses in the same industry

Question 40

advantages of horizontal integration

Answer 40

Economies of Scale (EOS):

By merging with or acquiring another firm at the same level of production, companies can expand their scale of operations, leading to lower average costs per unit due to more efficient use of resources, technology, and fixed assets.

Cost Savings from Rationalisation of the Business:

Horizontal integration allows firms to consolidate overlapping activities, such as administration, marketing, and distribution, eliminating redundancies and reducing operational costs.

Creates a Wider Range of Products:

Acquiring or merging with a company that offers complementary products helps firms diversify their product lines, improving their market offerings and reducing dependency on a single product or market segment.

Reduces Competition by Removing Key Rivals:

Horizontal integration reduces the number of competitors in the market, allowing the integrated firm to increase its market share and enjoy more pricing power, which can enhance profitability.

Question 41

disadvantages of horizontal integration

Answer 41

Diseconomies of Scale:

As firms grow larger through horizontal integration, they may experience inefficiencies, such as increased managerial complexity, communication issues, and bureaucratic delays, which can increase average costs rather than reduce them.

Reduced Flexibility:

Larger firms often struggle to adapt quickly to changes in market conditions or consumer preferences, as decision-making becomes slower and operations more rigid due to the scale and scope of the combined business.

Risk of Destroying Shareholder Value:

Mergers and acquisitions may fail to deliver the anticipated synergies, leading to integration challenges, cultural clashes, or overvaluation, ultimately resulting in a decline in the firm’s profitability and shareholder value.

Risk of Attracting Scrutiny from Competition Authorities:

Large horizontal mergers that significantly reduce competition in the market can attract the attention of regulators, potentially leading to investigations, fines, or even the blocking of the deal, which can delay or nullify the expected benefits.

Question 42

what is conglomerate integration

Answer 42

Conglomerate integration is a type of merger or acquisition where two companies that operate in entirely different industries or markets come together.

Question 43

advantages of conglomerate integration

Answer 43

Diversification of Risk:

By merging with a company in an unrelated industry, firms can spread their exposure across multiple markets, reducing the risk of being overly dependent on one sector’s performance.

Increased Financial Stability:

Operating in different industries can provide more stable cash flows, as downturns in one market can be offset by stronger performance in another, helping the firm withstand economic volatility.

Access to New Markets:

Conglomerate integration allows a firm to expand into entirely new industries, increasing its market reach and providing opportunities for growth and new revenue streams.

Utilization of Surplus Cash:

Firms with excess capital can invest it in acquiring companies in different industries, leading to more efficient use of financial resources rather than holding idle cash.

Cross-Promotion Opportunities:

The conglomerate structure can allow for cross-promotion between unrelated businesses, creating synergies by marketing different products to an expanded customer base.

Question 44

disadvantages of conglomerate integration

Answer 44

Lack of Expertise in New Markets:

Entering an entirely different industry means the acquiring firm may lack the necessary expertise, which can lead to poor decision-making, operational inefficiencies, and difficulties in managing the new business.

Increased management complexity.
-Managing a diversified range of businesses requires more complex oversight and coordination, which can be difficult to achieve efficiently.
- This complexity can stretch management resources, leading to higher administrative costs and slower response times across business units.

Increased risk of financial instability.
- Investing across unrelated industries might seem like a way to reduce risk, but it can expose the company to more volatile financial performance if some sectors underperform.
- Poor performance in one area may reduce cash flow and place financial strain on the entire conglomerate, potentially harming investor confidence.