Micro Pack 6 Flashcards
What is the difference between private sector and public sector organisations?
Private sector: organisations not owned by the government but by individuals
Public sector: owned and controlled by the government
What is the difference between profit and non-for-profit organisations?
Profit organisations: making a profit as a business goal
Non-for-profit: do not have making a profit as a goal but use any profit they generate to support their aims
What is unlimited liability?
- some smaller-for-profit private sector organisations operate as sole traders or partnerships
- means they both own and control their business
- co they have unlimited liability meaning they are personally liable for the business’ debts
What is limited liability?
- to avoid unlimited liability many businesses set up as companies owned by shareholders
- means legally the business and their owners are different legal entities and the shareholders have limited liability
- so shareholders are not personally liable for the business’ debts and can only lose what they invested
- shareholders are entitled to vote at the AGM and dividends (share of profits each year)
What is the difference between private limited companies (ltd) and public limited companies (plc)?
public limited company can sell shares on the stock market, whereas a private limited company has a restricted number of shareholders
What is divorce of ownership from control?
- when the managers and directors of a business are a different group of people to the owners
- likely in large companies
- could be because shareholders have interests in several companies or too many shareholders to run the company effectively
- instead elect directors (who represent shareholders) who in turn appoint managers
- however as directors/managers control the business, they may be able to pursue alternative objectives rather than profit maximisation for the owners, e.g maximise revenue through business growth
What is the principal-agent problem?
- shareholders (the principal) want to maximise their profits but are unable to run businesses daily
- so hire directors/managers to run it (agents) in order to maximise profits/dividends
- however, difficult to exactly monitor actions of management accurately due to imperfect information, so managers can pursue objectives to maximise own welfare and not profits for shareholders
- managers may try to maximise own salary/perks or profit satisfice
What are the solutions to the principal agent problem?
- AGMs shareholders have power to vote directors onto/off board of directors and pass resolutions
- however only a minority of shareholders are likely to attend/vote
- can try align interest of shareholders to the directors
- using share ownership schemes or performance related pay: so directors/managers would also want to maximise profits as they would gain higher dividends (if shareholders) or bonuses
What are the reasons firms grow?
- higher profits: by launching new product/entering new market/using takeovers
- greater market share and monopoly power: so face less competitions as begin to dominate market and gain more monopoly power, so can raise prices and boost profits
- Economies of scale: reduce long run average costs - e.g bulk buying, can then lower prices, make more competitive
- Reduced risk: diversification and so less reliant on one industry or product
- higher barriers to entry: e.g from a patent, so can get high sales revenue without other firms entering market, also brand loyalty
- divorce of ownership from control: managers may be able to pursue growth strategy
What are the reasons firms stay small?
- niche marketing and meeting customer needs: benefit from niche markets (luxury products) allowing them to charge premium price, specialist needs require more tailored, smaller scale production
- allows a more personal service: in industry where it is expected, e.g hairdressers, can also lead to price rises as customers likely to stay loyal
- lack of expertise or motivation to expand: means more work, less leisure etc
- high competition and low barriers to entry: excess profit may be competed away by new entrants
- reduced attention and scrutiny: avoid attention of regulators and competition authorities, as well as attention of rival firms who may take them over
- avoid diseconomies of scale: inefficiencies of communication, motivation etc, which may lead to higher costs and lower profit margins = increase prices = less competitive
- Tax reasons: support given to smaller firms
- barriers to growth: lack of access to finance to expand, competition
What is organic growth?
- increasing size of its own operations, rather than via takeovers- e.g developing new products, opening new stores
Advantages:
- building on business strengths: already have expertise = more chance of success
- lower risk
- more sustainable growth: steadily increased over time - consider future strategies
Disadvantages:
- growth dependant on market growth and competition: less likely when declining/high competition
- limits to organic growth: if already have a large market share
- slower growth: shareholders may want dividends in short term
What are different types of external growth?
horizontal integration
vertical integration
conglomerate integration
What is vertical integration?
Forwards: firm merges with/takes over a firm further on in chain of production in the same industry
Backwards: firm merges with/takes over a firm in a previous stage in change of production in same industry
Advantages:
- higher profits: more profits in supply chain than before
- economies of scale: controls more of supply chain, operating on larger scale so gain lower interest on loans due to reduced risk of default as larger more established
- limiting competition
- greater control: control quality/cost
Disadvantages:
- will merge/takeover be cost effective: cost of purchasing other business
- competition issues: could be investigated by CMA
- diseconomies of scale: communication/co-ordination issues so may need to raise prices
- potential clash of cultures
- lack of expertise
- over-dependence on one market: issues if entire industry starts to decline
What is horizontal integration?
- where a firm merges with/takes over a firm at the same stage of production in the same industry
Advantages:
- higher profits: gain higher sales/profits previously earned by rival business and also gain unique assets/ideas
- reduced competition and greater monopoly power
- economies of scale: reduce long-run average costs, reduce profits = more competitive = increase profit margins
- allowing rationalisation and lower costs: reorganising business to improve efficiency
- spreading risk: although same market could sell different products so less reliant on one product
Disadvantages:
- will merger/takeover be cost effective: cost of purchase
- potential competition issues
- diseconomies of scale: greater chance of inefficiencies when operating on a larger scale - communication, co-ordination issues etc
- potential clash of cultures
- morale and productivity issues: job losses in attempts to reduce costs through rationalisation
- over-dependence on one market
What is conglomerate integration?
- where a firm merges with/takes over a firm in a completely different industry
e.g Sainsburys and argos
Advantages:
- higher profits: access to new market, which could be growing/experiencing rising sales
- diversifying risk: less risk from being over-specialised
- economies of scale: benefit from purchasing economies of scale if they have overlapping supply chains, as lower risk for banks when lending to business operating in multiple markets
- synergy: combining positive qualities of two entities so economic prowess emerges greater than sum of the parts - opportunities for lower costs: sharing production/retail spaces or expertise
- asset stripping: when a company or investor buys a company with the goal of selling off its assets to make a profit
Disadvantages:
- will merger/takeover be cost effective
- lack of expertise in new market
- risk of losing brand image: if business has scandal/problem damage reputation of all other products
- diseconomies of scale
- lack of synergy/clash of cultures
