Flashcards in The Business Organisation Deck (29)
What are economies of scale?
Where larger firms can produce at lower average costs than smaller firms.
They can pass these EoS to consumers as lower prices.
This helps increase: sales, market share & profits.
What is diversification?
Where larger firms can afford to produce more products than smaller firms.
They can sell into different markets and reduce the risks that a decline in sales of 1 product will harm the business (less threat to profits).
What is financial support?
Larger firms are less likely to go bust than smaller firms as banks are more willing to lend larger firms money as they employ lots of people and are more likely to survive cash flow problems.
What is personal vanity?
Where some owners enjoy the power and status that comes from owning a large business.
What is market domination?
Larger market share a firm has, more it can control the price of its products.
It faces fewer competitor threats and may be able to eliminate rivals by charging prices they can't compete with.
What were the 5 reasons for?
Why firms grow.
What are the 3 methods of internal expansion?
1) Firms produce more of its current products to sell in its existing markets.
2) Firm can sell its current product into new markets.
3) Firm could launch a new product: similar to existing ones (line extension) or completely new product.
What is a benefits of internal growth?
1)) Relatively inexpensive to achieve.
2) With the exception of diversifying into a completely new product, the firm expands by doing more of what it's already good at - making its existing products (less likely to fail).
What are the problems of internal growth?
1) Takes a long time to achieve growth.
2) Some owners aren't prepared to wait.
What are the 4 basic ways a firm can merge with / take over other firms?
1) Firm joins with a supplier so the firm can control the supply, cost and quantity of raw materials.
2) Firm joins with 1 of its competitors, creating more EoS and bigger market share for the firm so it's more able to compete than before.
3) Firm takes over a customer, giving the firm greater access to customer: owning its own retail outlets makes it easier to sell products.
4) 2 unrelated firms join (firm expands by diversifying) into new markets, reducing risk of relying on a few products.
Why don't mergers and takeovers always go smoothly?
1) Management styles often differ between firms: employees only motivated by 1 company culture.
2) They create a bad feeling: firm agrees to be taken over but regrets it afterwards.
3) Lead to cost-cutting, may make lots of people redundant so they can lead to tension and uncertainty among workers.
What are the benefits of expanding through franchising?
1) Increase brand awareness and market share of a firm's products without usual costs and risks.
2) Firm can achieve greater EoS, benefit from increased sales of their products.
3) Franchisor saves money on wages and other costs.
What is a benefit and problem shareholders will have on the growth of a business?
B) Any increased profit the expansion brings.
P) May be asked to buy more shares and invest more money to help further expansion.
What is a benefit and problem owners will have on the growth of a business?
B) Greater revenue as more items will be sold to more customers.
P) Greater costs to pay i.e. FC & VC.
What is a benefit and problem employees will have on the growth of a business?
B) Greater job security as larger businesses are less likely to fail than small firms
P) May feel less involved in the running of the business as large firms tend to be more hierarchical (workers in large firms are more likely to join a trade union to protect their interests than workers in small firms).
What is a benefit and problem customers will have on the growth of a business?
B) They’ll pay cheaper price as the business is taking advantage of the purchasing EoS.
P) Larger firm may have fewer competitors and be able to charge higher prices.
What is a benefit and problem suppliers will have on the growth of a business?
B) Increases sales as a larger firm needs to buy more supplies.
P) Weaker position when negotiating prices as more of their competitors will be keen to supply the large firm (and the large firm can drive a hard bargain because of this).
What is a benefit and problem a bank will have on the growth of a business?
B) The business might require a loan from the bank in which they can charge high interest rates and gain money.
P) The loan will probably be quite large and the bank might need the lent money to lend to someone else or use for itself.
What is a benefit and problem the government will have on the growth of a business?
B) Collect more taxes as the business becomes larger and more profitable.
P) Some businesses can become so powerful and influential that governments struggle to pass laws that threaten the interests of the business.
What is a plc?
An Ltd. which is owned by public shareholders.
When is a plc formed?
When an Ltd. is 'floated' on the stock market, allowing any member of the public to buy shares in the company.
What are the advantages of a plc?
1) Limited liability.
2) Can raise much more capital by selling shares through a stock exchange (more potential buyers).
3) Increased capital allows company to grow and diversify.
4) Company status is increased by becoming a plc (banks are more willing to lend money to them).
What are the disadvantages of a plc?
1) Divorce of ownership and control:
Shareholders own the company; directors control day-to-day running.
Directors make decisions which don't directly benefit the shareholders, can lead to disagreements.
2) Someone may buy enough shares to overtake the company - if they convince the shareholders to sell.
3) Shareholders want max. profit, making it hard for a plc to purse other objectives.
What are the social costs of a business?
1) Businesses can have environmental costs (damage the environment).
2) Many resources are non-renewable.
3) Some businesses make harmful products - Gov't has to spend money to treat illness caused by this.
4) Business activity can raise other ethical questions.
What are the social benefits of a business?
1) Taxes on businesses' profits help pay for Gov't services like schools & hospitals.
2) Businesses provide jobs for millions of people.
3) Provide other essential services to help keep the country moving.
4) Goods provided by businesses can improve people's health and keep them safe / happy.
How can objectives change over time?
New & small businesses are more likely going to have survival as their main objective whereas bigger, established businesses may focus on market domination or expanding overseas.
Why do firms become multinational (MNEs) ?
1) Minimise transport costs: produce in various countries.
2) Increase knowledge of local market conditions.#
3) Reduce risks from foreign exchange fluctuations.
4) Gain access to raw materials or cheap labour.
5) Avoid paying tax: employ expert accountants and move £ between countries.
How do MNEs benefit the host country?
1) Source of foreign investment.
2) Create unemployment for locals.
3) Bring their own methods of working (gives foreign tech & working methods).
4) Profits can be a source of taxation revenue.
5) Exports goods: host country --> foreign markets.