5: Business Behaviour

Question 1

Demergers

Answer 1

a business strategy in which a single business is broken into two or more components, either to operate on their own, to be sold or to be disolved i.e. 1997 Pepsi announced a demerger of its deals with Pizza Hut, KFC and Taco to focus on competition with Coca Cola

Question 2

Why do you demerge?

Answer 2

Lack of synergies
Value of company/share price
Focussed companies

Question 3

Impact of a demerge on the business

Answer 3

Efficient
Innovation
Higher survival chance
Less economies of scale

Question 4

Impact of a demerge on workers

Answer 4

Lead to promotions
May result in job loss due to aim of being more efficient

Question 5

Impact of a demerge on consumers

Answer 5

Efficiency + innovation = better products + cheaper prices
Less efficient due to economies of scale = raised prices/reduced quality of goods due to motivation for profits

Question 6

Total revenue =

Answer 6

Price x Quantity

Question 7

Average revenue =

Answer 7

Total revenue / Quantity

Question 8

Marginal revenue (defintion and formula) =

Answer 8

Additional revenue gained by a firm from selling an additional unit. Change in TR / Change in output

Question 9

Profit =

Answer 9

Total revenue - total costs

Question 10

Agent of a firm

Answer 10

A person, company or organisation that has na influence on an economy by producing, buying or selling

Question 11

Divorce of ownership and control

Answer 11

When an owner of a business does not control and does not get involved in the day to day running of the business

Question 12

Not-for-profit organisation

Answer 12

Establishments that are used for the welfare of the community and people

Question 13

Public sector organisation

Answer 13

Provide goods/services for the community and owned by the government

Question 14

Private sector organisation

Answer 14

Owned by individuals and are driven by profit

Question 15

Seperation of ownership and control

Answer 15

When shareholders possess little or no direct control over management decisions

Question 16

Co-operative type of firm

Answer 16

Business/organisation that’s owned and controlled by its members to meet shared needs i.e. co-op supermarket or co-op bank

Question 17

Partnership type of firm

Answer 17

Two or more people oversea business operations and share profits and liabilities i.e. RedBull + GoPro

Question 18

Privately owned firm (LTD)

Answer 18

Owned by a closed circle of shareholders who can’t sell shares to external investors i.e. local retailers

Question 19

Public Limited Company (PLC)

Answer 19

Can sell shares on the stock market i.e. Amazon

Question 20

Social Enterprise (not for profit)

Answer 20

Puts interests of the people above prodit i.e. cooperative

Question 21

Start up business

Answer 21

A company in the first stages of operation i.e. AirBnB or dropshipping

Question 22

State-owned business

Answer 22

An entity formed by the government for the purpose of engaging in commercial activities i.e. British Buiness Bank

Question 23

Why do firms seek to grow?

Answer 23

Increase market share
Lower costs through economies of scale
Generate more revenue
More sales
Maximise profits

Question 24

Why do some firms remain small?

Answer 24

Owner’s decision
Nature of the product
Avoid diseconomies of scale
Limited production capacity
Small target market

Question 25

Principal agent problem

Answer 25

The conflict in interests and priorities that arises when one person or entity takes actions on behalf of another person or entity

Question 26

Ways a corporation can overcome the principal agent problem

Answer 26

Full transparency Align the interests of the both principal and the agent Remove any conflicts of interest

Question 27

Backward/forward vertical integration

Answer 27

A company expands to fufil a role behind them/infront of them in the supply chain i.e. a brewer buys a hop farm or a vehicle manufacturer buys a car retailership

Question 28

Pros of vertical integration

Answer 28

Control of supply chain -> reduces costs + improves quality Improved access to raw materials

Question 29

Cons of vertical integration

Answer 29

Loss of focus High costs Less flexibility

Question 30

Organic growth

Answer 30

Increasing capital and enhancing sales internally

Question 31

Pros of organic growth

Answer 31

Lower risk More sustainable

Question 32

Cons of organic growth

Answer 32

Can be slower Growth may limited

Question 33

Horizontal integration

Answer 33

Acquisition of another company in the same industry i.e. Facebook with Instagram

Question 34

Pros of horizontal integration

Answer 34

Expands market share Grow in revenue Improved efficiencies

Question 35

Cons of horizontal integration

Answer 35

Less flexibility Regulatory scrutiny

Question 36

Conglomerate integration

Answer 36

A merger between two firms in different industries i.e. Amazon and Whole Foods

Question 37

Conglomerate integration pros

Answer 37

Diversification Expanded customer base

Question 38

Conglomerate integration cons

Answer 38

Clashing cultures Loss of efficiency Shift away from core business

Question 39

External growth

Answer 39

A merger/takeover happens to a business by a third party that results in increased investment

Question 40

How can smaller firms survive and remain profitable in markets with bigger scaled businesses?

Answer 40

More flexible Fill niches Social profiles with customers

Question 41

Factors that act as a constraint on business growth

Answer 41

Size of the market - demand limited in small/niche markets Access to finance - hard to expand with difficulty in getting loans and raising capital Owner objectives - some owners want to remain small Industry regulation - may introduce costs

Question 42

Activist shareholders

Answer 42

Uses an equity stake in a corporation to put pressure on its management

Question 43

Performance-related pay

Answer 43

Linkign salaries to individual based performance

Question 44

Stakeholder conflict

Answer 44

Interests/goals of stakeholders clash

Question 45

Rationalisation

Answer 45

Changing a pre-exisitning workflow into one that's more goal orientated and based on a specific set of rules

Question 46

Marginal productivity

Answer 46

The amount produced by each additional worker. Change in output / change in workers

Question 47

What happens if marginal productivity falls?

Answer 47

Marginal costs will rise

Question 48

Economies of Scale

Answer 48

Reducing average total costs as output increases

Question 49

Economies of scale Fun Mums Try Making Pies??

Answer 49

Financial - large firms negotiate cheaper finance deals Managerial - use of specialists Technical - changes to 'productive process' Marketing - expensive marketing spread over lots of sales Purchasing - able to buy in bulk

Question 50

Diseconomies of scale

Answer 50

The average cost of production increases as output increases

Question 51

External economies of scale

Answer 51

Cost savings outside of a firm but within an industry i.e. better transportation network

Question 52

Minimum efficiency scale (MES)

Answer 52

Minimum level of output needed for a business to fully exploit economies of scale

Question 53

At what point is profit maximisation on a monoply diagram?

Answer 53

MR = MC

Question 54

At what point is revenue maximisation on a monoply diagram?

Answer 54

MR = 0

Question 55

At what point is sales maximisation on a monoply diagram?

Answer 55

ATC = AR

Question 56

At what point is satisficiny on a monoply diagram?

Answer 56

Triangal between profit max and sales max