The Birth and Growth of Firms

Question 1

What is Turn over?

Answer 1

The amount of sales

Question 2

How is market share measured

Answer 2

By turn over or by volume of units

Question 3

Define capital employed

Answer 3

The amount of money invested in a buisness

Question 4

4 ways in which a firm an be measured

Answer 4

Turnover, Market share, Capital employed and the number of employees

Question 5

What is a barrier to entry?

Answer 5

A factor which prevents new firms from entering an industry.

Question 6

what are the 5 main barriers to entry?

Answer 6

Initial capital costs: such as factories and plant machinery

Marketing and branding: Firm has to spends lots of money getting its products recognized.

EOS: new firms wont have this so there products ill b more expensive.

Limit pricing: existing firms set there sale price below that of the new firms cost of production this deters them firm entering the market.

Patents: These give a firms legal monopoly for 25 years. this prevent new firms from entering and s very prevalent in the technology industry

Question 7

How is legislation and regulation a constraint on growth?

Answer 7

The competition commission will investigate mergers that will result in 1 company having a greater than 25% share of an industry

Question 8

2 reasons why some firms remain small?

Answer 8

Size of the market

Motives of the owner

Question 9

Why do some small firms survive?

Answer 9

Low barriers to entry: so they dot have to grow to survive

Niche market: small market needs a small firm.

Personal service: customers prefer this as apposed to a large corporation.

Question 10

5 Motives for firms?

Answer 10

Higher profits

EOS

Market power and price leadership

Prestige

Diversification

Question 11

What are the benefits of higher profits?

Answer 11

More investment

ability to build barriers of entry

increased dividents for shareholders

Question 12

Benifits of market power and price leadership

Answer 12

Price leaders determine prices therefor the company has greater control of the market

Question 13

why is diversification good?

Answer 13

Spreads risk making the firm more stable

Question 14

What is internal growth?

Answer 14

When a company grows as a result of investment or growth into new markets. (organic growth)

Question 15

What is external growth?

Answer 15

Growing by a take over or merger (inorganic growth)

Question 16

What is Horizontal integration?

Answer 16

when firms merge at the same productive process. E.G. Tesco’s and Waitrose

Question 17

What are the 4 advantages of Horizontal integration?

Answer 17

EOS

Prestige

Fast growth

Increased marketshare

Question 18

What are the disadvantages of economies of scale?

Answer 18

DEOS: communication and motivation

Question 19

What is vertical integration?

Answer 19

When firms merge that are at different stages of the production process

Question 20

What is backward vertical integration?

Answer 20

This is integration is when a firms takes over a firms that is in the productive process previous to theirs. E.G. Brewery takes over a hop farm.

Question 21

3 Advantages to the firms of backward vertical integration?

Answer 21

Firms can better control quality

Firms have a secure supply of the raw materials

lowers AC due to the supply not having to make a profit

Question 22

Disadvantages of backward vertical integration?

Answer 22

Causes firms to get complacent with manufacturing methods due to less of the price mechanism being involved in the manufacturing process so may result in an increased cost for consumers later on.

Question 23

What is forward vertical intergration

Answer 23

When the firm takes over the next stage of the productive process. E.G. Brewery takes over a pub.

Question 24

What are the 3 benefits to the firm of forward vertical integration?

Answer 24

Secure outlet for products as there will always be a buyer

Reduces AC as profit does have to be made at each stage.

The manufacturer can chose how best to display the products increasing sales

Question 25

2 Disadvantages of forward vertical integration?

Answer 25

less promotions such as discounts as this has greater impact on the firm.

Reduces the number of retail outlets less potential customers

Question 26

what is a conglomerate

Answer 26

when a companies takes over firms that are unrelated E.G. Virgin

Question 27

What are the 2 possible advantages of conglomerate to a Firm?

Answer 27

Spreads risk meaning that a company can survive a harsh financial environment.

sharing of high quality mangers ensuring quality remain high

Question 28

What are the 2 potential disadvantages of a conglomerate for the firm?

Answer 28

DEOS particularly communication and co-ordination

Lack of business knowledge in the new sector

Question 29

What are the advantages to consumers of horizontal integration?

Answer 29

Lower prices: As a result of Lower AC cost from firms passing the saving along to consumers.

Increased range of products

Better service as managers can pick and chose the best staff from the original 2 companies

Question 30

What are the 3 Disadvantages to consumers of horizontal integration?

Answer 30

Higher prices: Firms now have stronger position and reduced competition.

Lower Quality: again as a result of increased competition

Reduced selection of products for customers so that the companies make more money

Question 31

What are the 3 advantages to backward vertical integration for customers?

Answer 31

Better quality products: as firms can control the quality of the supplied goods

Increased availability of stock: As firms control supply.

Cheaper products: Due to lower supply cost firms may pass this on to consumers.

Question 32

What are the 2 disadvantages of Backward vertical integration?

Answer 32

Reduced choice: as firms try to maximize profits

Suppler may get complacent as they no longer have to make money so may lead to deterioration of the product..

Question 33

What are the 2 advantages to forward vertical integration to customers?

Answer 33

Quality of service will increase: as staff will have more knowledge of the product as they are involved with its production.

Lower prices: Firms not making money at each stage there for can deliver the product at a lower price.

Question 34

What are the 2 disadvantages to forward vertical integration to consumers?

Answer 34

Reduced stock: as the retailer my only stock the companies products and no other

Higher prices: Firms use their power to drive up prices.

Question 35

3 Advantages to employees from mergers?

Answer 35

Increased job security: due to bigger companies being able to survive.

More Jobs: Bigger firm more jobs

Better career path: as people can move up within an economy

Question 36

2 disadvantages to employees of a merger?

Answer 36

Loss of jobs: New firm may cut cost and reduce staff this will result in job losses.

Reduction in Morale: Bigger firm looses personal touch.

Question 37

Define a demerger

Answer 37

when a firm separates into two or more separate parts in order to create two or more separate businesses.

Question 38

How does the lack of synergies lead to demergers

Answer 38

The combination of the firms does not lead to the expected cost savings and may even lead to DEOS.

Question 39

How does a demerger lead to better value for share holders?

Answer 39

As it cuts out the weak part of the business so by cutting it out directors can give shareholder better dividents.