Theme 3.1.1 Flashcards
(28 cards)
Why do some firms remain small?
Owners wish to maintain control
Avoiding diseconomies of scale- as firms grow, average costs may rise due to managerial inefficiencies, communication breakdowns and demotivated staff
Niche market- if the market demand for their g or s = limited
Lack of finance for expansion- small firms may struggle with collateral or credit ratings
Regulations- competition laws restrict any-competitive mergers - CMA in the UK investigates
Owner’s objectives - small businesses may prioritise profit satisficing or independence
Managerial capacity- someone entrepreneurs lack the skills/resources required to manage a large org effectively
What are the characteristics of organic growth
Growth is internal (no evidence that it’s external)
Borrowing from banks rather than finance from takeover
The business has grown naturally without the need to takeover or merge
Why do some firms grow
Make more sales and profit
Increase market power- gives them the ability to influence prices and restrict the ability of other firms to enter the market , helping them to make profits in the long run- monopoly power often means firms have monopsony power and so will be able to reduce their costs by driving down the prices of their raw materials.
Diversify and enjoy risk-bearing economies
Exploit internal economies of scale- helps to decrease C.O.P and decrease LRAS + can sell more goods and make more revenue = larger profit
What are all the types of internal economies of scales
Richard’s Mum Flies Past The Moon
Risk-bearing
Managerial
Financial
Purchasing
Technical
Marketing
Define the term “divorce of ownership from control”
Occurs in larger firms (especially PLCs) where owners (shareholders) are not the same as those who control the day to day business decisions (managers/directors)
Describe the principal agent problem
When the agent (manager who runs and controls the business) pursues different objectives to the principal (shareholders who own the business)
Why does the principal agent problem occur
Asymmetric information- there is not the same level of knowledge across both parties : shareholders may want profit maximisation whilst managers may seek sales growth, revenue maximisation, market share or personal perks (bonuses, company cars etc). Agents take advantage of this difference of information
A02 - Anthony Jenkins and Barclays (2012-2015)
Jenkins (CEO of Barclays) In 2015 it emerges he had approved over £2.4bn in bonuses for executives during a time of underperformance and scandal fallout- caused Barclays share price to fall by 15% during his leadership- shareholders (principals) felt he neglected their returns and he was removed from the board.
What is the significance of the divorce of ownership from control?
Misaligned incentives - decisions made that don’t max profit or long run value- could lead to inefficiency, waste or firm collapse.
Share price impact- if investors see management acting against shareholder interest, confidence may drop -Lower share price.
Short vs long term thinking- managers might focus on short term profits to secure bonuses rather than long term investments.
Risk Aversion- managers may avoid risk taking that could benefit the firm but endanger their job security- e.g resisting long term investments in R&D due to uncertainty involved.
Give the distinction between public and private sector organisations: ownership & control, profit motive and funding source
Ownership & Control: public sector org are owned by the gov, while private sector org are owned by private individuals or entities.
Profit motive: private sector firms aim to generate profits while public sector orgs often provide services w/o a profit motive.
Funding source: public sector orgs are funded through taxes and gov budgets , while private sector orgs rely on investments, loans and rev.
Give examples of public sector firms
NHS
State schools
BBC (publicly funded through license fees)
What are the key characteristics of public sector organisations
Maybe loss making but justified by social benefit
Often natural monopolies (e.g railways, water)
Decisions are included by politics and public policy
Give some examples of private sector organisations
Tesco
Apple
Private schools and hospitals
Uber
What are the key characteristics of private sector organisations
Operate under market forces (supply and demand)
Efficiency driven due to competition
Decision making focused on returns to shareholders
Evaluation for the distinction between private and public sector organisations
Services don’t always stay in one sector - gov may privatise public sectors or nationalise private firms- this shows that the boundary between the public and private sector isn’t fixed - it changes over time due to political ideology or economic pressures.
Give examples of privatisation -AO2
Royal Mail- privatised in 2013- the gov believe the private sector would modernise operations, increase investment and, improve efficiency
British Telecom- privatised in 1984 - under Margaret thatcher’s conservative gov , the UK aimed to reduce the size of the public sector , promote market efficiency and cut gov spending- the privatisation would make it more competitive and innovative.
Give an example of a nationalised organisation- AO2
East Coast Main Line- nationalised in 2018- the private operator Virgins Trains East Coast, failed to meet agreed performance and payment targets- the gov renationalise the line to ensure continuity of service, improve reliability and avoid disruption to passengers- shows that when the private sector fails ,the state may have to step in to protect public interest
Define Nationalisation
The transfer of ownership and control of a business or industry from the private sector to the public sector
State the purpose of nationalisation
To protect strategic industries, prevent market failure, or ensure public access to essential services
Define privatisation
The transfer of ownership and control of a business or industry from the public sector to the private sector
State the purpose of privatisation
To improve efficiency, increase competition, and reduce government spending
Give the distinction between profit and not-for-profit organisations : profit orientation, revenue sources & distribution of profit
Profit orientation: profit organisations aim to generate income that exceeded their expenses while not-for-profit organisations prioritise their mission of profit.
Revenue sources: profit organisations rely primarily on sales and investments for revenue while not-for-profit organisations made depend on donations and grants.
Distribution of profit: profit organisations distribute profits to shareholders or reinvest it where is not-for-profit reinvest surplus in their mission
Give examples of profit organisations
Amazon
Shell
McDonalds
Give examples of not-for-profit
Oxfam
The Red Cross
National Trust
