3.1 Flashcards
Why do firms grow ?
Gain economies of scale
Increase size > Decrease LRAC > Increase Productive Efficiency
Increase market share
Dominant in market > Set prices high/ higher bargaining power with suppliers
Diversify
Way of spreading risk
Owner objective
Want to see business grow > See it succeed > remuneration from the profits
What is meant by the divorce of ownership of control
Where the people who own the business appoint mangers to run the business for them
In relation to business, what is meant by the principal agent problem
Where the owners of the business have the main objective of profit maximising but the managers may have not profit objectives, e.g improving their working conditions.
Making decisions that don’t align with the owner
Characteristics of the public sector
Funded by the government
No incentive to be efficient
Operate at a cost
Characteristics of the private sector
Profit max objectives, driven by demand and supply
Funded by shareholders
Whats an not for profit organisation
A business run to achieve ethical objectives rather than profit
Whats organic growth, give some examples
Growth that occurs internal to the business, with out mergers/ acquisitions/ takeovers.
E.g. Product launches, new stores
Advantages of organic growth
Less risk > no threat of a merger failing and losing capital
Business morale higher > less disruptive behaviour thus efficiency won’t be damaged
A lot cheaper > high admin costs associated with merging
Disadvantages of organic growth
Slower > need to build up retained profit to grow
May lack as high EofS compared to rivals , lose competitive advantage
If market isn’t growing, then the business is limited
