3.1 Flashcards
(31 cards)
Why some firms remain small
They operate in a niche market
Profit satisficing
Why firms grow
Meet objectives e.g. profit maximisation, sales maximisation.
Gain competitive advantages - economies of scale
External/internal forces
The divorce of ownership from control
Those who earn a firm (shareholders) are not the same people who control the business daily. This can lead to conflicts between objectives.
Principal agent problem
When there is a difficulty in getting one party (managers) to work in the best interest in the principle (shareholders) parties best interest.
Moral Hazards
When the individual is willing to take risks because the impact of failure will be felt more by the owner than the individual - can be caused by the principle agent problem.
Private sector
The sector of the economy owned and controlled by individuals rather than the government
Public sector
The sector of the economy owned and controlled by the government
Internal growth
Organic e.g. opening new stores/ product development.
External growth
Outside the business e.g. mergers/takeovers
Internal contraction
Delayering/ closing down stores
External contraction
Selling off elements of the business
Advantages of internal growth
Less risky
Greater consistency
Less loss of control
Less threat of brand dilution
Disadvantages of internal growth
Missed opportunities from acquisitions Potential for growth may be more limited Can take a long time Lack of shared expertise Dissatisfaction from shareholders Missed opportunities for greater economies of scale
Integration
The bringing together of two or more firms
Merger
When 2+ firms agree to integrate to form one firm under joint ownership.
An agreement
Takeover
When one firm gains control over another and becomes the owner. Buying 50%< of the shares.
Can be hostile
Horizontal Integration
When two firms at the same stage within a process integrate.
e.g. two hotels integrate
Vertical integration
When two firms at different stages within a process integrate.
Forward vertical integration
When a firm takes over another firm ahead of it in the process.
e.g. a farmer takes over a retailer.
Backward vertical integration
When a firm takes over another firm behind it in the process
e.g. a retailer obtains a farm
Conglomerate integration
When two unrelated firms integrate
e.g. a car manufacturer merges with a bookstore.
Advantages of vertical integration
Secure supplier secure outlet gain foothold in a market benefit from expertise brand recognition synergy Achieve corporate objectives
Disadvantages of Vertical Integration
Finance required
Clash of culture
can impact on focus of the business
Can impact economies of scale as different processes
Diseconomies of scale can occur due to communication problems
Advantages of Horizontal Integration
Gain monopoly power Benefit from expertise Remove competition from the market Achieve economies of scale Synergy Achieve corporate objectives
