3.5 - Firms

Question 1

Firm

Answer 1

An organisation that uses resources to produce a product, which it then sells

Question 3

Classification of firms (2)

Answer 3

• By sector: primary, secondary, tertiary
• By owenership: public, private

Question 4

Primary sector

Answer 4

Firms in industries within the primary sector of an economy specialise in the production or extraction of natural resources by growing crops, managing forests, mining coal etc.

Question 5

Secondary sector

Answer 5

Firms within industries in the secondary sector of an economy will use unprocessed natural resources and other unfinished products to make other goods: manufacturing
- for example, oil is used in plastics, glass is made from sand, and paper is made from pulped wood

Question 6

Tertiary sector

Answer 6

The distribution and sale of manufactured goods and the provision of services to consumers is the final stage in their production
- firms in the wholesale and retailing industries specialize in these activities

Question 7

Public sector

Answer 7

A part of the economy that comprises all organizations that are owned and operated by the government

Question 8

Private sector

Answer 8

The part of the economy that is run by individuals and companies for profit and is not state controlled

Question 9

State-owned enterprise

Answer 9

A business enterprise where the government or state has significant control through full, majority, or significant minority ownership

Question 10

Industrial sector

Answer 10

Contains firms that use similar production processes and specialise in the production of a similar range of products.

Question 11

Through what characteristics can you measure the size of a business? (4)

Answer 11

• The number of employees
• Capital employed
• Market shared
• Sales turnover (revenue)

Question 12

Small business

Answer 12

An independently owned business that usually has the owner as its manager and has only a small amount of employees

Question 13

Advantages of small businesses (name 3)

Answer 13

• Flexibility - can adapt to quick changes as the owner is more involved
• Personal service - owners are easily accessible to offer customer service
• Lower wages - no trade unions = employees has weak negotiating powers; owners are able to impose wages to the legal minimum wage
• Better communication - since there are fewer employees, information can be reached easily
• Innovation - faces more pressure to become innovative, hence they are more prepared to take risk as they have less to lose

Question 14

Disadvantages of small businesses (name 3)

Answer 14

• Higher cost - cannot exploit economies of scales; average cost will be higher than larger rivals = lack of competitive edge
• Lack of finance- struggles to raise finance as choice of sources is limited
• Staff - hard to attract experienced staff as they lack resources (not able to afford the wage, training required for a specific skill)
• Vulnerability - when trading conditions fluctuate, it is hard to survive as they lack resources

Question 15

Internal growth

Answer 15

Internal growth, also known as organic growth, occurs when a company uses its own tools and resources to expand.

Question 16

Ways that internal growth can happen (name 3)

Answer 16

• Developing new product ranges
• Launching existing products directly into new international markets (e.g. exporting)
• Opening new business locations - either in the domestic market or overseas
• Investing in additional production capacity or new technology to allow increased output and sales volumes

Question 17

Advantages of internal growth (name 2)

Answer 17

• Incremental, even-paced growth
• Provides maximum control
• Preserves organisational culture
• Encourages internal entrepreneurship
• Allows firms to promote from within

Question 18

Disadvantages of internal growth (name 2)

Answer 18

• Slow form of growth
• Need to develop new resources
• Investment in a failed internal effort can be difficult to recoup
• Adds to industry capacity

Question 19

External growth

Answer 19

External growth usually involves a merger or takeover of another existing business.
* can be friendly (merger) or hostile (takeover)

Question 20

Advantages of external growth (name 2)

Answer 20

• Reducing competition
• Getting access to proprietary products or services
• Gaining access to new products
• Obtaining access to technical expertise
• Gaining access to an established bran name

Question 21

Disadvantages of external growth (name 2)

Answer 21

• Incompatibility of top management
• Clash of corporate cultures
• Operational problems
• Increased business complexity

Question 22

Backwards vertical integration

Answer 22

When a firm merges/takes over their supplier, backwards in the supply chain

Question 23

Horizontal integration

Answer 23

When a firm merges/takes over their competitor in the same industry in the same sector

Question 24

Forwards vertical integration

Answer 24

When a firm merges/takes over their customer, forwards in the supply chain

Question 25

Conglomerate integration

Answer 25

When a firm merges/takes over a business in a completely different industry

Question 26

Economies of scale

Answer 26

When an increase in the scale of output results in a lower cost per unit (optimum size)

Question 27

Diseconomies of scale

Answer 27

When an increase in the scale of output results in higher costs per unit (the business is too big)

Question 28

Define internal economies of scale

Answer 28

Result of the growth in the scale of production within the firm

Question 29

Define external economies of scale

Answer 29

When there is an increase in the size of the industry in which the firm operates

Question 30

Examples of internal economies of scale (name 3)

Answer 30

- purchasing economies - technical economies - financial economies - marketing economies - managerial economies - risk-bearing economies

Question 31

Examples external economies of scale (name 3)

Answer 31

- Access to skilled workers - Job marketing benefits - Shared infrastructure - Specialist service providers (ancillary firms)

Question 32

Risk-bearing economies of scale

Answer 32

Large firms (high output) sell into different markets and produce a variety of products (diversification) - business risks are spread over a wider range of products/markets - in case of market failure, other products can continue business

Question 33

Financial economies of scale

Answer 33

Banks more willing to lend to large firms, more financially secure in repaying loans (trust and good reputation) - also likely to get lower rates of interest - large firms can sell shares to raise capital - more capital and lower costs

Question 34

Marketing economies of scale

Answer 34

- afford their own vehicles to distribute products: cutting down costs - cost of advertising is spread over a much larger output in large firms

Question 35

Technical economies of scale

Answer 35

Large firms are financially able to invest in good technology, skilled workers, machinery etc. - efficiency cuts costs for the firm

Question 36

Purchasing economies of scale

Answer 36

Large firm can buy raw material in bulk because of high scale of production - supplier usually offer price discounts for bulk purchases, cut costs for the firm

Question 37

Access to skilled workers

Answer 37

Large workers can recruit workers trained by other firms - efficiency and productivity of workers cuts costs

Question 38

Joint marketing benefits

Answer 38

Firms in the same industry are located close to each other: they can enhance reputation and customer base - promote one-another / merge

Question 39

Shared infrastructure

Answer 39

Development in infrastructure of an industry / economy can benefit large firms - e.g. more roads and bridges by govn. can cut transport costs

Question 40

Specialist service providers (ancillary firms)

Answer 40

They are firms that supply materials / services to larger firms (e.g. marketing, research etc.) - if located located near a company, the company can cut costs by using their services more cheaply than other firms

Question 41

Examples of diseconomies of scale (name 3)

Answer 41

- management diseconomies - skills shortages - supply constraints - labour diseconomies - regulatory risks

Question 42

Management diseconomies

Answer 42

Large firms have wide internal organisations (lots of managers and employees) - makes communication difficult, decision-making slow - gradually leads to inefficient running of firms: increases costs

Question 43

Skills shortage diseconomies

Answer 43

Firms are unable to attract skilled labour - have to spend more on training and wages: increasing costs

Question 44

Supply constraint diseconomies

Answer 44

Too much output requires large supply of raw materials, power etc. - shortages halt production, reducing profit and increasing costs

Question 45

Labour diseconomies

Answer 45

Large firms can use automated production (lots of capital) - workers may feel bore during repetitive tasks: demotivation and lack of cooperation - can lead to strikes: stopping production and increasing costs

Question 46

Regulatory risk diseconomies

Answer 46

Firms become so large that smaller firms cannot compete - end up dominating supply and controlling market price - governments may introduce laws to reduce the firm's control