Business growth Flashcards
types of firms
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
sizes of firms
1- 9 = micro business
10-250 = SME (small to medium)
why is profit maximisation the objective for firms
Reinvestment
- When firms maximize profits, they generate substantial financial resources.
- This enables reinvestment into various aspects of the business, such as capital upgrades, technological advancements, or R&D. For instance, technology firms like Apple use their large profits to innovate and maintain competitive edges.
- Reinvestment supports long-term growth, improves productivity, and enhances a firm’s ability to compete in domestic and international markets. This can also benefit consumers through higher-quality products and services.
Greater Dividends to Shareholders
- Profit maximization allows firms to pay higher dividends to their shareholders, which can attract further investment. - For example, companies like Unilever and Procter & Gamble maintain shareholder confidence by ensuring substantial returns.
- This encourages more investors, increases stock valuation, and secures a consistent source of capital for expansion.
Lower Costs and Prices for Consumers
- By maximizing profits, firms can focus on improving efficiency and reducing production costs. - Lower costs give firms the flexibility to lower prices while maintaining profit margins, benefiting consumers with affordable products.
- Lower prices can lead to increased demand, greater market share, and potentially higher overall profits, creating a virtuous cycle.
Rewarding Entrepreneurship
- Entrepreneurs undertake significant risks to establish and run businesses. Profit maximization ensures they are adequately compensated for their innovation, time, and resources. For example, small business owners reinvest profits into expanding operations and securing their livelihoods.
- Higher profits incentivize innovation and encourage others to pursue entrepreneurial ventures, supporting economic growth and job creation
who are shareholders
owners of a company
when does profit maximisation occur
when MARGINAL COSTS = MARGINAL REVENUE
why does profit maximisation occur at MC = MR
- 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
why might businesses choose not to profit maximise
- 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.
what is profit satisficing
making just enough profit to keep shareholders happy
what is a stakeholder
any person who has an interest in how the business is running
examples of stakeholders
- shareholders
- managers
- consumers
- workers
- govt
environmental groups
which of the stakeholders may be negatively affected because of profit maximisation
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.
why is it bad to harm certain stakeholders
- 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.
why might companies want to maximise revenue
EOS
- 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.
what is predatory pricing
Occurs when a firm sets its prices below average cost (often below variable cost) in the short run to eliminate competitors from the market. Once rivals exit or are significantly weakened, the firm increases prices to recoup losses and establish dominance, often leading to reduced competition and potentially higher consumer prices in the long run.
- Amazon has been accused of predatory pricing in the e-book market. It allegedly sold e-books at a loss to undercut competitors like Barnes & Noble and smaller independent bookstores. By offering these lower prices, Amazon attracted a significant share of the market, weakening its competitors who could not match its prices due to lower economies of scale
when does revenue maximisation occur
when MR = 0
when is there sales maximisation
when AC = AR
why might firms want to maximise sales
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
- 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.
other objectives of firms
- 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.
- 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.
