LS1 - Sizes And Types Of Firm Flashcards
Why do some firms seek growth?
Firms seek growth to:
increase profit
lower costs
gain market power
diversify
meet managerial objectives
What is one reason firms seek growth in regards to profit?
Increasing in size enables a firm to produce more goods and services, boosting sales and revenue, which leads to higher profit and allows for increased investment.
How does business growth affect a firm’s costs?
It often results in lower unit costs due to economies of scale, allowing for higher profit.
What is market power and how does it relate to business growth?
Market power is the ability of a firm to raise prices and earn supernormal profit. Larger firms have more market power.
Define diversification in the context of business growth.
Diversification involves increasing the range of products or markets served by a business, reducing risk by not relying on a single market or product.
How +why do firms seek growth through diversification.
A firm entering a foreign market (e.g. the German firm Lidl opening its first UK store in 1994) or producing a new good or service, e.g. Amazon providing groceries.
Both are examples of diversification. Diversification is beneficial to firms because it reduces risk. For instance, if one country in which a firm operates experiences a recession, the firm can rely on sales from other countries to prevent a large dip in sales.
Why might managers pursue firm growth?
Managers may seek growth to increase their income through bonuses, to satisfy their ego, or to command respect by leading a large firm.
Why do some firms choose to remain small?
Some firms remain small to avoid diseconomies of scale, avoid extra work and risks, and face fewer legal requirements.
What are diseconomies of scale?
Diseconomies of scale occur when a business grows too large, causing the costs per unit to increase.
Why might some firms be unable to expand?
They might lack the necessary financing, operate in niche markets, lack required skills and expertise, or be unable to cope with additional regulations and bureaucracy.
Describe the ownership structure of private-sector firms.
Private-sector firms are not owned by the government and may be owned by shareholders (PLCs), families, sole proprietors (owned and run by one person) , or partnerships (e.g. accountancy and legal firms).
What is the primary goal of private-sector firms?
To make a profit to satisfy the demands of their owners.
What are public-sector firms?
Firms owned by the government, often because they need state funding to operate or because the government wishes to control their direction
Give examples of a public-sector firm in the UK.
Network Rail, which operates the UK’s railway tracks but is owned by the government and run on the basis that it will not make a profit for shareholders but instead will reinvest any surplus funds.
What characterizes not-for-profit organizations?
Example = charity. They exist to provide services to communities and do not see profit as their primary goal, such as Oxfam and local pressure groups.
