sizes and types of firms, business growth Flashcards
why may a firm want to grow?
- more sales + profit
- increased market power- firm no longer a price taker
has an influence over the price
- diversify products/ markets- if certain products are unpopular, firm may remain popular
- exploit internal economies of scale
- entrepreneur has a desire to build an empire- behavioural motive
why may a firm want to stay small?
- dont have the finance to expand
- regulations to stop the firm becoming too big
- niche market- difficult to expand
not enough customers to become large scale - personalised products
- internal diseconomies of scale- increase long run average cost
- profit satisfice- owner wants a quiet life
- very competitive market
- difficult to get a permit
what is public sector?
owned by govt
what is private sector?
owned by private individuals (can be for profit/ non-profit)
what is the principal-agent problem?
- when a firm is run by a different person that owns it
those in charge arent the people who run the business - agent and principal may have different objectives which leads to a divorce of ownership and control
- agent doesnt pursue objective of principal- asymmetric information
who are the principals?
shareholders/ owners
what is organic growth and how can it be brought about ?
growth using internal finance, reinvesting profits→ no mergers to increase production capacity
can be brought about by:
growing their consumer base
development + launching of new products
what is inorganic growth?
growth through mergers and acquisitions
what are the adv of organic growth?
- less risky option→ you know the market + products
- keep ownership/ control of firm
- less need to borrow money → financed through internal funds
- they know how to operate in this market -> so theyre building on heir strengths
- dont have to wory about clashes of objectives as they dont have to merge with a firm
what are the disadv of organic growth?
- slow→ have to wait to get the profit
- can be difficult to grow more
- can lose control if you sell lots of shares
- growth achieved dependent on consumer demand
franchise can be hard to manage efficiently
what is horizontal integration?
merging/ acquiring a firm at the same stage of the production process→ doesnt have to be the same industry
what is backward vertical integration?
- integrating with a firm that is earlier in the production process, so is further than the customer
e.g ikea bought forests (supply of wood)
what is vertical integration?
firms are at different stages of production process
what is forward vertical integration?
merging with a firm that is closer to the customer in the supply chains
what is conglomerate integration?
firms integrate that are in completely different supply chains (production processes)/ move between markets
completely unrelated goods
whats the role of the CMA?
- CMA ensures firms act in the best interest of consumers
keeps choice
keeps competition
lowers prices
takeover require permission from CMA
why may the CMA reject a merger?
CMA will likely reject a merger if the firm has 25% of market share as it would lead to higher prices for the consumer
recall the different types of integration
conglomerate
forward vertical
backward vertical
horizontal
what are the benefits of horizontal integration
economies of scale
higher market share
the firms can build on eachothers strengths
remove rivals
what are the drawback of horizontal integration
diseconomies of scale
lower competition due to higher market share-> may lead to higher prices for consumers
job losses due to the removal of of duplicate roles
may attract attention of CMA
what are the benefits of vertical integration
more control over the supply chain
greater economies of scale (compared to horizontal mergers)
improve access to key raw materials
better control over retail distribution
what are the drawbacks of vertical integration
diseconomies of scale
what does it mean if a market is concentrated
only a few firms in the market
what are the benefits of conglomerate integration
reduce risk as many markets follow fluctuations that are in line with the economic cycle but arent always synchronised so by co operating on many markets the firm can even out its activity -> protects from micro/macro volatility
what is the disadvantage of conglomerate integration
may be inefficient as different activities undertaken may require different skills and specialism
give some examples of horizontal mergers/ potential ones
asda and sainsburys
what may acts as a constraint on the growth of firms
CMA/ regulation
size of market
financial constraints
niche market
human capital shortages i.e skills shortages
how might a firm overcome the constraints on growth of firms
offer training for employees to overcome human capital shortages
