LS1-2 Flashcards
What are the reasons for growth?
Profit: more production so more sales and revenue
Economies of scale: lower cost per unit
Market power: gain in market power allows them to set prices and supernormal profit
Diversification: increase the range of products or markets, leads to lower risk
Managerial objectives: CEOs receive bonuses so there is incentive, satisfies ego and respect
Why do some firms choose to stay small?
Simpler and cheaper legal requirements
Could have diseconomies of scale(increase in cost per unit)
Owners may not want the risk or extra work
Could be taken over if too big
Why are some firms forced to stay small?
They can’t finance expansion, risky loan for bank
No room to expand in niche markets
Lacking skills and enterprise
Lack of resources to cope with regulation
What are the 3 types of firms?
Private sector
Public sector
Not for profit
Characteristics of a private sector firm
Owned by individuals, shareholders from stock market
Family owned firms like LEGO can’t sell shares
Sole proprietors
What are the characteristics of public sector firms?
Owned and funded by governments
Reinvests profits
Like NHS
Characteristics of non profit organisations
Provides services and doesn’t aim to make a profit
What are principles and agents?
Principal: owner or shareholder
Agent: manager responsible for running
What is the principal agent problem?
Agents make decisions on behalf of principles. The principal may not be aware or there may be asymmetric information so the decisions may not match what the owners want
This conflict happens when a firm is too large
What is internal(organic) growth?
Growth by increasing the usage of factors of production to increase output
Hiring more workers, investing in capital
Could diversify
What is external(inorganic) growth?
Growth by taking over(hostile) or merging with other firms(2 firms become 1 entity)
What are the 3 types of integration?
Horizontal, vertical, conglomerate
What is horizontal integration?
When 2 firms that are operating at the same stage of production in the same industry merge(like BMW taking over rover)
Leads to reduced competition and more market share
What is vertical integration?
When 2 firms at different stages in production in the same industry merge
Can be forward like component manufacturers with assembly plant
Can be backward like food manufacturers taking over a farm
Firms have more control over production process, quality, reliability and efficiency
What is a conglomerate merger?
2 firms in different markets merge like unilever and nestle
Allows diversification and reduced risk if one market crashes
What are the advantages of organic growth?
Lower risk and owners/agents have the same control
More job opportunities
Disadvantages of organic growth
Slower as existing workers must be retrained
Expensive
Advantages of inorganic growth?
Instant access to economies of scale
Increased market share immediately
Greater control over supply chain, reliability, efficiency, quality
Diversification
Combines experience and skills from multiple firms which also saves costs(only 1 financial team needed)
Disadvantages of inorganic growth?
Diseconomies of scale
Duplicate staff need to be made redundant
Firms have have differing objectives
Expensive
Affect of growth on the consumer?
Economies of scaled could lead to price reduction
Better quality and choice
But firms may have more market power and set prices
Less output overall
Can be blocked
What is a demerger? What are reasons
If a firm experiences diseconomies of scale they may split up into specialist smaller firms to maximise economies of scale
Could sell off a underperforming part of a firm
Liquidates
Could be due to gov intervention
Loss of focus
What is the impact of a demerger on businesses?
They become more efficient and profitable
Less diseconomies of scale
But less market share/power
Impact of demerger on workers
Less principle agent problem as there are less people
Creation of jobs as 2 financial teams are needed again
Increased efficiency
Impact of demergers on consumers?
Changed bank branches
More competition so better quality and lower prices
More customer focused
