demergers and business objectives Flashcards
what is a demerger?
a demerger is when a firm decides to split into separate firms
what are the reasons for a demerger?
- focusing on core businesses to cut costs
improve profit margins + returns to shareholders - reduce risk of diseconomies of scale
by reducing range of functions in a business + achieve lower management costs - raise money from asset sales + return it to shareholders who have equity in the business
- defensive tactic
avoid the attention of competition of authorities who might be investigating market power - may have conflicting aims + objectives
- production systems may not have been compatible
- corporate cultures may collide especially if its an international merger
what is the impact of a demerger on businesses ?
- long term→ higher returns/ operating profits
- short term→ cost of selling off a part of their business
- difficult for smaller firm to maintain the position in the market it held before the merger
- profits can be reinvested
- business can focus on sore business or remove loss making sections in the firm
what is the impact of a demerger on consumers?
impact on prices depends on the effect of a de merger on the intensity of industry competition
what is the impact of a demerger on workers?
job losses if demerger is driven by a desire to control unit costs
But… new jobs may be created e.g from a successful management buyout
what is the relationship between short run and long run average cost?
the LRAC curve envelopes the SRAC curve + is always equal to or below the SRAC curve
draw the relationship between SRAC and LRAC on a graph?
why does SRAC fall and then rise?
SRAC falls at first + then rises due to diminishing returns
why is it not possible to move from A to C in the short run?
because certain factors of production are fixed
how would you increase output if you’re producing at point A?
If producing at point A, to increase output, B is the only possible option in the short run
what is SRAC impacted by?
impacted by productivity + law of diminishing returns
what is LRAC impacted by?
impacted by internal economies + diseconomies of scale
recall the key objectives of businesses?
revenue maximisation
profit maximisation
sales maximisation
profit satisficing
what is revenue maximisation?
seeking to make the highest possible revenue
MR=0
what does it mean if MR=0?
revenue is maximised
what does it mean if MR=MC?
profit maximisation
what is sales maximisation?
selling the highest number of products that they can without making a loss
what does it mean if MR=MC
profit maximisation
what is profit satisficing?
company make enough profit to satisfy the influencers e.g shareholders , workers
draw a cost/revenue diagram and identify all of the points of maximisation?
why may a firm want to profit maximise
- to reinvest into e.g R+D, innovation
- to pay dividends (a share of the profit) for shareholders to reward them as shareholders pay into the business
- lower costs and lower prices for consumers
- reward entrepreneurship as a reward as entrepreneurship is risky
why may firms not profit maximise
they dont know where their MC=MR as its difficult to measure
avoid scrutiny from the CMA as they make think its dodgy e.g CMA may think that firms are cutting corners to cut their costs
key stakeholders could be harmed
other objectives may be more appropriate
why may firms profit satisfice
stakeholders may be harmed if firms are profit maximising e.g
consumers may have to pay higher prices so that firms can make more profit
workers wages may be reduced to cut costs for firms
if cost cutting harms the environment then environmentalists wont be happy
why may a firm revenue maximise
for economies of scale benefit -> greater growth, lower AC, maybe lower prices
to predatory pricing-> revenue max price is lower than profit max price to drive out competitors
principle agent problem- agents may use rev max to use as justification for perks in the job
why may a firm sales maximise
economies of scale
this price is at the limit pricing-> to limit competition
principle agent problem -> to gain benefits from their job
flood the market- to develop brand loyalty so that they can then change their objective to e.g profit or rev maximise
what other business objectives may there be
survival-> short term objective to develop brand loyalty and make people aware of their product or during a recession
public sector organisations-> they want to maximise society welfare and produce where demand equal supply (P=MC) which is the allocatively efficient point
corporate social responsibility -> ethics are important
what point does profit satisficing occur
any point between profit max and sales max
