T3 BUSINESS OBJECTIVES AND GROWTH Flashcards
what is Profit satisfice
where a firm or individual seeks to achieve an acceptable or satisfactory level of profit rather than maximizing profits.
Reasons why some firms grow while others stay small (4)
However, firms might lack the finance to expand
However, regulations might prevent firms from growing
However, firm might be in a niche market or selling personalised goods
diseconomies of scale
Write the definition of: The divorce of ownership and control
When the managers/directors of a firm are different from the owners of the firm.
Write the definition of: The principal-agent problem
The principal-agent problem is when the agent pursues different objectives to the principal
What is an example of the principal-agent problem
Workers pursuing different goals than what the ceo wants.
Write the definition of: Private sector firms
firms owned by private individuals.
Not-for-profit firms
Not-for-profit firms are not looking to just make a profit, they also pursue other social and environmental objectives.
what is organic growth
Organic growth is when a firm grows by investing in itself to increase output.
Inorganic growth
is when a firm grows by acquiring, or merging with, another firm.
backwards vertical integration is when:
A firm integrates with another firm who is further away from the consumer in the same production process
What are the 4 types of inorganic growth
Backward vertical integration
Forward vertical integration
Horizontal integration
Conglomerate integration
What is forward vertical integration
A firm integrates with another firm who is closer to the consumer in the same production process
What is horizontal integration
A firm integrates with another firm at the same stage of the production process
What is conglomerate integration
is when two firms in unrelated industries join together
What is vertical integration
Vertical integration is when firms at different stages of the same production process join together.
what are the pros of organic growth? (2)
using a bank loan or reinvesting profit to grow organically, a firm’s owner will keep control over the company. So the owner will take most of the firm’s profit.
organic growth is low risk because the firm expands by increasing its own output in a market it is already familiar with and selling a good/service it is already good at producing
What are the cons of organic growth
organic growth can mean slower growth. Whereas a firm can grow very quickly inorganically by merging/acquiring
What are the pros of vertical integration
Better access
Control of supply chain
reduce intermediary costs
What are the cons of vertical integration
Regulation
costs from diseconomies of scales
costs from acquisitions
lack of expertise
Internal economies of scale are when
A firm experiences reductions in long run average cost, as a firm’s size increases
What are the different types of internal economies of scale
RMFPTM. Risk-bearing, Managerial, Financial, Purchasing, Technical, Marketing.
what are the pros of horizontal mergers? (3)
economies of scale which reduce a firm’s LRAC
reduces competition
rationalisation
What are the cons of horizontal integration (3)
diseconomies of scale
job losses
brand dilution
What is rationalism in the context of horizontal mergers
when firms reorganise to avoid duplicated costs
What are the pros of conglomerate integration
increase awareness
risk bearing economies
knowledge transfers
What are the cons of conglomerate integration
diseconomies of scale
lack expertise
brand dilution
What are the three types of diseconomies of scale
Alienation
Bureaucracy
Communication
What does successful knowledge transfers through conglomerate integration lead to
increased dynamic efficiency
What is demerging
Demerger refers to the process of a company separating one or more of its business units or divisions into independent entities
What are the benefits of demergers
reduce the size of the firm. This reduces diseconomies of scale
firms can separate and specialise in their own goods/services
firm can sell of one of its divisions and its assets, to raise money
avoid conflicts between different departments because of culture differences
What are the cons of demergers
job loss or decrease in job security
reduces in economies of scale may lead to higher prices
Pros and cons of demergers to workers
P: reduced cultural conflicts
C: Decreased job security
Why do demergers decrease job security
Workers won’t know which new division they’ll join after the demerger
if one of the division is sold to raise funds, workers may lose their jobs
what is meant by influencers of the firm
owners, shareholders, directors/managers, workers and consumers.
What are Shareholders objectives
Shareholders usually look to maximise profit. This is done by an increase in the stock price
Directors/managers objectives (2)
Maximising sales increases their sales bonus
maximising revenue increases company size, boosting their prestige.
Workers objectives (3)
higher wages, job security and improved working conditions.
Consumers objectives
lower prices, better customer service and quality,
they also care about social and environmental causes
Where will a revenue-maximising firm produce:
MR = 0
Where does a sale maximising firm produce
AR = ATC / AC
What is meant by sales maximisation
Sales maximisation is when a firm maximises its sales without making a loss
This is achieved where AR = AC
What is meant by revenue maximisation
Trying to maximise revenue, producing at point mr=0
divorce of ownership and control can lead to:
principal agent problem
Explain how vertical integration can be an anti-competitive practice:
Firms can vertically integrate to take control of scarce resources
and then refuse to let new firms use these scarce resources, stopping them from entering the market.
