Sizes & Types of Firms and Business Growth Flashcards
What is a firm?
Firm- production unit- transforms resources into 🚘 and 🧹
What is industry?
Industry- collection of firms operating in same production process
Why do firms grow?
1) ⬆️ market share- dominant firms in industry set prices to their benefit … ⬆️ profit
2) ⬆️ profit- expansion-> ⬆️ output and sales, ability to set prices to maximise profit and benefiting from lower ⬇️ costs of production (economies of scale)
3) ⬆️ economies of scale- ⬆️ size-> lower cost per unit of output as costs spread over larger no. of 🚘 whilst initial costs lowered
4) satisfy managerial ambitions- managers grow business to satisfy their desire to run successful business- receive bonuses and other remunerations etc
5) gain power- prevents takeovers by larger businesses- ALSO allows survival during economic downturn
What is the divorce of ownership from control also known as?
The principal agent problem
What is the principal agent problem?
Principal agent problem- Agents make decisions on behalf of business that DON’T necessarily match with direction of owners- PROBLEM if principal ✖️ fully aware of actions of agent- lack sufficient info due to asymmetric info (one party knows more than other)
Who are the principals and who are the agents in the principal agent problem?
Shareholders are principals (owner of business) and managers or person in control of running business is agent
What is a real life example of the principal agent problem?
Gavin Patterson at BT was dismissed in June 2018 after disappointing financial results
How many types of firms are there?
3
What are the types of firms?
1) Private sector firms
2) Public sector firms
3) Not for profit firms
What is a private sector firm and what are its aims?
- ✖️ owned by the government- potentially owned by shareholders (PLC- public limited company) e.g. M and S- trading on stock market- anyone can buy shares
- OR family owned e.g. LEGO
- sole proprietors ALSO private sector firms- owned and run by single person e.g. newsagent
- aim to make profit to satisfy demand of owners
What is a public sector firm?
- government owned businesses
- either ✖️ survive without government funding or because government wants to determine direction of business
- examples- NHS, Network rail (reinvests surplus funds instead of taking as profit for shareholders)
What is a not for profit firm?
- third sector or civil society
- provides services to local, national and international communities
- examples charities like Oxfam etc
What are the 2 main ways in which businesses can grow?
1) Organic growth
2) Inorganic growth
What is organic growth?
Organic growth- when a firm expands the scale of its operations and gains a greater market share
- achieved investment into the firm by the firm itself (reinvest profits or fund investment through borrowing)
What are the advantages of organic growth?
👍- lowest risk form of growth- firms build on existing strengths while continue meeting consumer expectations- prevents any plummet in demand
👍- goods for workers morale- ⬆️ job opportunities in firm- ⬆️ scope for management roles
What are the disadvantages of organic growth?
👎- tends to be slow
👎- ppl may be unwilling to take on new ideas 💡 if they involve change
What is inorganic growth?
Inorganic growth- integration of firms- growth through takeovers
What are the 2 types of inorganic growth?
1) Horizontal integration (merger)- merger of 2 firms at the same stage of production process in the same industry
2) Vertical integration (merger)- merger between firms at different stages of production process in same industry
Why is vertical integration chosen?
To ⬆️ barriers to entry (obstacles to companies entering market/industry), ⬆️ control over suppliers or markets, ensure smooth production process
What is a real life example of a horizontal merger?
Aug 2018- retailer House of Fraser bought by retailer Sports Direct
What are the advantages of a horizontal merger to firms?
👍- ⬆️ market share
👍- economies of scale
👍- ⬇️ competition- 2 firms originally competitors now one
What are the disadvantages of a horizontal merger to firms?
👎- risky- ‘too many 🥚 in 1 🧺’- unknown costs etc
What are the advantages of a horizontal merger to employees/other stakeholders?
👍- opportunities for promotion
👍- increases prestige of firm
What are the disadvantages of a horizontal merger to employees/other stakeholders?
👎- loss of jobs for those unable to move to new headquarters
👎- loss of jobs for those duplicating work- same job done by someone else already e.g. in other firm- same roles in both companies … unlikely all workers kept
