Sizes & Types of Firms and Business Growth Flashcards

1
Q

What is a firm?

A

Firm- production unit- transforms resources into 🚘 and 🧹

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2
Q

What is industry?

A

Industry- collection of firms operating in same production process

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3
Q

Why do firms grow?

A

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

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4
Q

What is the divorce of ownership from control also known as?

A

The principal agent problem

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5
Q

What is the principal agent problem?

A

Principal agent problem- Agents make decisions on behalf of business that DON’T necessarily match with direction of owners- PROBLEM if principal βœ–οΈ fully aware of actions of agent- lack sufficient info due to asymmetric info (one party knows more than other)

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6
Q

Who are the principals and who are the agents in the principal agent problem?

A

Shareholders are principals (owner of business) and managers or person in control of running business is agent

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7
Q

What is a real life example of the principal agent problem?

A

Gavin Patterson at BT was dismissed in June 2018 after disappointing financial results

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8
Q

How many types of firms are there?

A

3

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9
Q

What are the types of firms?

A

1) Private sector firms
2) Public sector firms
3) Not for profit firms

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10
Q

What is a private sector firm and what are its aims?

A
  • βœ–οΈ 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
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11
Q

What is a public sector firm?

A
  • government owned businesses
  • either βœ–οΈ 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)
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12
Q

What is a not for profit firm?

A
  • third sector or civil society
  • provides services to local, national and international communities
  • examples charities like Oxfam etc
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13
Q

What are the 2 main ways in which businesses can grow?

A

1) Organic growth

2) Inorganic growth

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14
Q

What is organic growth?

A

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)

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15
Q

What are the advantages of organic growth?

A

πŸ‘- lowest risk form of growth- firms build on existing strengths while continue meeting consumer expectations- prevents any plummet in demand
πŸ‘- goods for workers morale- ⬆️ job opportunities in firm- ⬆️ scope for management roles

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16
Q

What are the disadvantages of organic growth?

A

πŸ‘Ž- tends to be slow

πŸ‘Ž- ppl may be unwilling to take on new ideas πŸ’‘ if they involve change

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17
Q

What is inorganic growth?

A

Inorganic growth- integration of firms- growth through takeovers

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18
Q

What are the 2 types of inorganic growth?

A

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

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19
Q

Why is vertical integration chosen?

A

To ⬆️ barriers to entry (obstacles to companies entering market/industry), ⬆️ control over suppliers or markets, ensure smooth production process

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20
Q

What is a real life example of a horizontal merger?

A

Aug 2018- retailer House of Fraser bought by retailer Sports Direct

21
Q

What are the advantages of a horizontal merger to firms?

A

πŸ‘- ⬆️ market share
πŸ‘- economies of scale
πŸ‘- ⬇️ competition- 2 firms originally competitors now one

22
Q

What are the disadvantages of a horizontal merger to firms?

A

πŸ‘Ž- risky- β€˜too many πŸ₯š in 1 πŸ§Ίβ€™- unknown costs etc

23
Q

What are the advantages of a horizontal merger to employees/other stakeholders?

A

πŸ‘- opportunities for promotion

πŸ‘- increases prestige of firm

24
Q

What are the disadvantages of a horizontal merger to employees/other stakeholders?

A

πŸ‘Ž- loss of jobs for those unable to move to new headquarters
πŸ‘Ž- 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

25
Q

What are the 2 types of vertical mergers?

A

1) Backwards vertical merger

2) Forwards vertical merger

26
Q

What is a backwards vertical merger?

A

Firm merges with firm closer to suppliers in a production process

27
Q

What is a real life example of a backwards vertical merger?

A

Nov 2017- Tesco (πŸ‡¬πŸ‡§ supermarket) bought Booker (food wholesaler)

28
Q

What are the advantages of a backwards vertical merger to firms?

A

πŸ‘- assured supplies in terms of timing ⏰ and quality- own suppliers
πŸ‘- ⬇️ costs of supply

29
Q

What are the disadvantages of a backwards vertical merger to firms?

A

πŸ‘Ž- lack of expertise- merge with firm closer to consumers rather suppliers in production process
πŸ‘Ž- over exposure to end product in one market- ⬇️ diversification

30
Q

What are the advantages of a backwards vertical merger to employees/other stakeholders?

A

πŸ‘- opportunities for promotion
πŸ‘- ⬆️ market presence
πŸ‘- ⬆️ profitability could-> ⬆️ share price in long run

31
Q

What are the disadvantages of a backwards vertical merger to employees/other stakeholders?

A

πŸ‘Ž- initial costs may damage profitability and … share price in short run

32
Q

What is a forwards vertical merger?

A

Firm merges with firm closer to market/consumers in production process

33
Q

What is a real life example of a forwards vertical merger?

A

Aug 2018- Coca-cola πŸ₯€(drinks maker)- bought drinks retailer Costa Coffee

34
Q

What are the advantages of a forwards vertical merger to firms?

A

πŸ‘- ⬆️ access to customers … ⬆️ sales and profit

πŸ‘- better info about consumer- tailor 🚘 to match consumer preference

35
Q

What are the disadvantages of a forwards vertical merger to firms?

A

πŸ‘Ž- over exposure to end product in one market- ⬇️ diversification
πŸ‘Ž- as firm merges with firm closer to consumers rather than suppliers in production process- may-> lack of expertise

36
Q

What are the advantages of a forwards vertical merger to employees/other stakeholders?

A

πŸ‘- opportunities for promotion
πŸ‘- ⬆️ market presence
πŸ‘- ⬆️ profitability could-> ⬆️ share price in long run

37
Q

What are the disadvantages of a forwards vertical merger to employees/other stakeholders?

A

πŸ‘Ž- initial costs may damage profitability and … share price in short run

38
Q

What is conglomeration also known as?

A

Diversification

39
Q

What is conglomeration (diversification)?

A

Firms involved in unrelated business areas merge

40
Q

What is a real life example of conglomeration (diversification)?

A

Jun 2017- Amazon (e-commerce retailer) bought Whole Foods (supermarket)

41
Q

What are the advantages of conglomeration (diversification) to firms?

A

πŸ‘- spreads risk- if one industry suffers, firm can still survive on other industries
πŸ‘- widens brand awareness- greater audience targeted … ⬆️ consumers know about brand

42
Q

What are the disadvantages of conglomeration (diversification) to firms?

A

πŸ‘Ž- dilution of brand (resources spread over more industries- βœ–οΈ focus on 1 anymore)- REAL problem if new industry/lines failing

43
Q

What are the advantages of conglomeration to employees/other stakeholders?

A

πŸ‘- ⬆️ job security

πŸ‘- opportunities to become occupationally mobile (switch between jobs)

44
Q

What are the disadvantages of conglomeration to employees/other stakeholders?

A

πŸ‘Ž- firm might become too large or disorganised to function efficiently (unmanageable)

45
Q

What is forward vertical integration?

A

Merger with firm at the next stage of production

46
Q

What is backward vertical integration?

A

Merger with firm at previous stage of production

47
Q

What is the aim of conglomerate integration?

A
  • greater spread of risk
  • widening range of output- ⬇️ exposure to any 1 market
  • allows firm to cross-subsidise investment in new areas
  • allows innovation without losing revenue drivers
48
Q

What is an example of conglomerate integration?

A

Richard Branson- πŸ‡¬πŸ‡§- virgin- diverse investment and entrepreneurship- ✈️, broadband, telecom etc