Sizes & Types of Firms

Question 1

Why do some firms decide to remain small?

5

Answer 1

• Avoid diseconomies of scale
• Small can be an attraction to certain buyers. Unique Selling Point
• Strong barriers to entry
• Requires investment
• Niche market

Question 2

Why do firms decide to grow?

5

Answer 2

• Benefit from economies of scale
• Monopolise
• Increased revenue & profits
• Shareholder demands
• Lower risk once already big

Question 3

How do small firms survive?

Answer 3

• Take advantage of low Price elasticity of demand for specialist ‘niche’ products to make larger profit
• Can avoid diseconomies of scale e.g. poor communication
• Some SMEs run as lifestyle enterprises, with owners looking to achieve a satisfactory return rather than maximise prof its (SATISFICING) e.g. small cafe shops
• Barriers to entry have been reduced due to online stores

Question 4

Divorce of Ownership

Answer 4

When the owners of a PLC (Publically Limited Company) are not in control of it e.g. most businesses are owned by shareholders, yet the majority of the time these people have no input in the running of the firm, this is the Managing Director’s job

Question 5

Principle Agent Problem

3

Answer 5

The interests of the principal group (shareholders) is in the hands of the agents (the directors)

Is an issue of Asymmetric Information (managers now more about the business than shareholders)

Shareholders will have goals of dividend payouts and higher share prices, but Directors may seek to maximise salaries and bonuses by maximising turnover, whereas this may not be beneficial to Shareholders. Directors also maybe more interested in Short-Term performance like cutting costs or reducing investment, but this could damage the Long-Term

Question 6

Public Sector Firms

2

Answer 6

• Main aim is to provide a service to the community
• Controlled and operated by the government. Often they are not efficient, as they do not face the level of competition that private sector firms do. Also, the employees are not under the same pressure to perform and turn a profit. Will often operate at a loss

Question 7

Private Sector Firms

3

Answer 7

• Main aim is profit
• Depending on owners incentives they may wish to maximise profits or have profit satisfaction
• Owned by private individuals

Question 8

Social Enterprises

Answer 8

• Works as a normal business, yet profits are reinvested for social purposes in the community
• e.g. Jamie Oliver’s fifteen chain of restraints hired ex-convicts