LS1-2

Question 1

What are the reasons for growth?

Answer 1

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

Question 2

Why do some firms choose to stay small?

Answer 2

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

Question 3

Why are some firms forced to stay small?

Answer 3

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

Question 4

What are the 3 types of firms?

Answer 4

Private sector
Public sector
Not for profit

Question 5

Characteristics of a private sector firm

Answer 5

Owned by individuals, shareholders from stock market
Family owned firms like LEGO can’t sell shares
Sole proprietors

Question 6

What are the characteristics of public sector firms?

Answer 6

Owned and funded by governments
Reinvests profits
Like NHS

Question 7

Characteristics of non profit organisations

Answer 7

Provides services and doesn’t aim to make a profit

Question 8

What are principles and agents?

Answer 8

Principal: owner or shareholder
Agent: manager responsible for running

Question 9

What is the principal agent problem?

Answer 9

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

Question 10

What is internal(organic) growth?

Answer 10

Growth by increasing the usage of factors of production to increase output
Hiring more workers, investing in capital
Could diversify

Question 11

What is external(inorganic) growth?

Answer 11

Growth by taking over(hostile) or merging with other firms(2 firms become 1 entity)

Question 12

What are the 3 types of integration?

Answer 12

Horizontal, vertical, conglomerate

Question 13

What is horizontal integration?

Answer 13

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

Question 14

What is vertical integration?

Answer 14

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

Question 15

What is a conglomerate merger?

Answer 15

2 firms in different markets merge like unilever and nestle

Allows diversification and reduced risk if one market crashes

Question 16

What are the advantages of organic growth?

Answer 16

Lower risk and owners/agents have the same control

More job opportunities

Question 17

Disadvantages of organic growth

Answer 17

Slower as existing workers must be retrained

Expensive

Question 18

Advantages of inorganic growth?

Answer 18

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)

Question 19

Disadvantages of inorganic growth?

Answer 19

Diseconomies of scale
Duplicate staff need to be made redundant
Firms have have differing objectives
Expensive

Question 20

Affect of growth on the consumer?

Answer 20

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

Question 21

What is a demerger? What are reasons

Answer 21

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

Question 22

What is the impact of a demerger on businesses?

Answer 22

They become more efficient and profitable
Less diseconomies of scale
But less market share/power

Question 23

Impact of demerger on workers

Answer 23

Less principle agent problem as there are less people
Creation of jobs as 2 financial teams are needed again
Increased efficiency

Question 24

Impact of demergers on consumers?

Answer 24

Changed bank branches
More competition so better quality and lower prices
More customer focused