Untitled Deck Flashcards
Why do some firms tend to remain small while others grow?
Reasons for Remaining Small:
- Market Niche: Small firms often serve specialized markets with limited demand, making large-scale operations unnecessary or unfeasible.
- Regulatory Burden: Smaller firms may avoid certain regulatory thresholds that apply to larger firms.
- Owner Preferences: Owners may prioritize personal control and simplicity over expansion.
- Limited Access to Finance: Smaller firms often face difficulty obtaining funding for growth.
Reasons for Growth:
- Economies of Scale: Larger firms can reduce average costs through bulk purchasing, specialization, and technological efficiencies.
- Market Power: Growth can increase a firm’s ability to influence prices and reduce competition.
- Diversification: Expanding helps reduce reliance on a single product or market.
What is the significance of the divorce of ownership from control in firms?
Definition: This occurs when the owners of a firm (shareholders) delegate decision-making to managers, creating a separation between ownership and control.
Principal-Agent Problem:
- Description: Managers (agents) may pursue their interests (e.g., higher salaries, prestige projects) rather than maximizing shareholder value.
- Significance: Misalignment can lead to inefficiency, reduced profits, or conflicts between owners and managers.
- Solutions: Shareholder oversight, performance-linked pay, or stronger corporate governance structures.
What is the distinction between public and private sector organizations?
Public Sector: Owned and operated by the government to provide services (e.g., NHS, public transportation).
- Funded by taxes and focused on social welfare, not profit.
Private Sector: Owned by individuals or shareholders, operating for profit (e.g., Apple, Tesco).
- Driven by market forces and profit maximization.
What is the distinction between profit and not-for-profit organizations?
Profit Organizations: Aim to maximize financial returns for owners or shareholders (e.g., multinational corporations).
Not-for-Profit Organizations: Aim to achieve social, cultural, or charitable goals without distributing profits to owners (e.g., charities, cooperatives).
- Any surplus is reinvested into achieving the organization’s mission.
How can businesses grow?
Organic Growth: Expansion through increased output, new customers, or product development.
- Example: Opening new stores or launching new products.
Vertical Integration: Combining with a firm at a different production stage.
- Forward Integration: Merging with a distributor/retailer (e.g., a manufacturer acquiring a retail chain).
- Backward Integration: Merging with a supplier (e.g., a car company acquiring a tire manufacturer).
Horizontal Integration: Merging with a firm at the same production stage (e.g., two competing supermarkets merging).
Conglomerate Integration: Diversifying by merging with a firm in an unrelated industry (e.g., a tech firm acquiring a food brand).
What are the advantages and disadvantages of different growth strategies?
Organic Growth:
- Advantages: Lower risk, control over growth pace, avoids cultural clashes.
- Disadvantages: Slower growth, limited by market size.
Vertical Integration:
- Advantages: Greater control over supply chain, improved profit margins, reduced dependency.
- Disadvantages: High cost, risk of inefficiency or overextension.
Horizontal Integration:
- Advantages: Increased market share, economies of scale, reduced competition.
- Disadvantages: Risk of regulatory intervention, potential for diseconomies of scale.
Conglomerate Integration:
- Advantages: Diversified risk, new revenue streams.
- Disadvantages: Lack of expertise in new markets, potential management complexity.
What constraints limit business growth?
Size of the Market: Limited demand can cap growth potential.
Access to Finance: Difficulty securing loans or investments can hinder expansion.
Owner Objectives: Owners may prioritize stability, lifestyle, or personal control over growth.
Regulation: Legal restrictions (e.g., antitrust laws) may prevent mergers or expansion.
Why do businesses undertake demergers?
Focus on Core Activities: Allows firms to specialize and improve efficiency.
Raise Capital: Selling parts of the business can provide funds for investment or debt repayment.
Regulatory Requirements: To comply with competition laws or avoid monopolistic practices.
Management Issues: Large, diversified firms may become unmanageable or inefficient.
What is the impact of demergers on businesses, workers, and consumers?
On Businesses:
- Improved focus on core operations, potential cost savings, and increased efficiency.
- Loss of economies of scale and reduced market presence in some cases.
On Workers:
- Job redundancies or restructuring may occur.
- Opportunities for career growth in newly independent entities.
On Consumers:
- Greater competition can lead to better prices and quality.
- Short-term disruption in services or product availability.
