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
