3.1 Flashcards
(34 cards)
Why do some firms grow?
1- To benefit from economies of scale
2- To increase market share
3- To reduce risk
4- To meet managerial objectives
Why do some firms remain small?
1- Size of Market is small
2- Limited access to finance
3- Owner objective to retain control of the business
4- Individual/personalised services
5- Need for a responsive/dynamic firm
What is the public sector?
The part of the economy owned by society as a whole and regulated/provided by the government.
What is the private sector?
The part of the economy in which assets are owned by individuals or groups
What are for-profit firms?
Firms that aim to make and maximise profits
What are not for profit firms?
Private firms for which the primary motive is not profit, however they do usually need to cover their own costs. e.g charities
What is the principle agent problem?
Where the objectives between principles and agents diverge and conflict with each other.
What is an example of the principle agent problem?
Shareholders want to maximise profits (to maximise dividends) whereas managers may want to increase sales at the expense of profits.
Define organic growth?
When a business increases output and sales using internal resources. For instance by purchasing new capital or taking on more workers.
What are the advantages of organic growth?
1- The firm can respond to changes in the market quickly
2- No need for restructuring
3- Less risk than with growth through a merger
4- Management has sound knowledge of the business
What are the disadvantages of organic growth?
1- Growth may be slower than through mergers or takeovers
2- The firm may get too specialised in areas that are becoming out of date.
3- The business might not take on new ideas or people
4- May decrease the competitiveness of the firm if growth is slow.
What is inorganic growth?
The expansion of a business via a merger or takeover.
Define a merger?
An agreement where two firms merge into one larger firm.
Define an acquisition?
A transaction in which one party buys some or all of a companies shares. May be hostile.
What are the 3 ways a firm can grow externally?
Horizontal integration, Vertical integration, Conglomerate integration.
Define horizontal integration
When two firms merge at the same production process. e.g secondary and secondary or primary and primary.
What are the advantages of horizontal integration.
1- To gain economies of scale
2- To increase market share
3- To eliminate a competitor thus enabling the firm to gain a degree of monopoly power.
4- A merger reduces the risk of being bought out by a rival company#
5- Increased revenue for the businesses due to having a larger customer base
What are the disadvantages of horizontal integration?
1- Risk is focused on a narrow range of goods and services.
2- Diseconomies of scale may occur
3- Buyout may be expensive
4- may be duplicate roles within the company or relocation of firm.
5- Duplicate equipment
Define Vertical integration?
When two firms merge together at different stages of the production process. It can be backwards and forwards.
Define backwards vertical integration?
Integration towards the supplier of raw materials.
What are advantages of backwards vertical integration?
1- control over raw materials means supply and quality are guaranteed.
2- other firms may be prevented from getting supplies.
3- the markup from the supplier can be profit for the buying firm.
What are the disadvantages of backward vertical integration?
1- The firm might not need to buy all the supplies
2- The firm might not have specialist knowledge of production meaning diseconomies of scale my occur.
Define forwards vertical integration?
Integration closer to the consumer. e.g a brewery buying a chain of pubs
What are advantages of forward vertical integration
1- Buying a retail outlet might guarantee that consumers see a firms product at its best.
2- The consumer may not be distracted by competitors products.
3- Able to conduct market research meaning the firm can make responses to consumer preferences.
