Types Of Firms

Question 1

Why do some firms remain small and how can this be overcome

Answer 1

Size market is small - operating in a specialist segment of market, low demand = remains small

Limited access to finance - small firms r high risks to banks ; unwilling to lend - BUT CROWDFUNDING (collecting small amount of capital from large group of indvs to finance a new business)

Owner objective to retain control of business - unwilling to expand

Lack of economies of scale = no incentive to grow if no cost savings - BUT CONCENTRATE ON NICHE MARKETS - specialised where there is less competition = more profitable (low comp and more price-elastic demand)

Indv personalised services - offer personal service, customers wish to deal with particular person

Question 2

Why do some firms grow

Answer 2

Benefit from economies of scale - large firms have lower costs of output in LR

Increase market share - large firms have more power market = control prices + retain customer loyalty. Threat of competitors reduced.

Reduce to risk - produce range of products (diversify), benefitting from economies of scope - less risk to being forced out of business if demand falls

Meet managerial objectives - pay + bonuses of managers related to sales revenue.

Question 3

State Principal- agent problem

Answer 3

When aims of the principals (shareholders) and agents (managers) diverge and conflict with each other.

Shareholders own most large businesses ( appoint managers to control business)
Shareholders maximise profits (dividends) and managers may have diff motives (increase sales and expense of profits)

Question 4

Horizontal integration and adv and dis

Answer 4

When firms merge at the same stage of the same production process - may not have the same products but want to increase range of products

Adv
- gain economies of scale (exploiting internal EOS = lower LRAC = increased profitability)
- Increase market share by reducing competition + removing/ taking over key rivals = increased pricing power (can increase prices to increase profit margins - monopoly power)

Dis
- risk of attracting scrutiny from competition authorities/ regulators which may be worried the merger = decreased competition = decreased consumer welfare
- diseconomies of scale from enlarged businesses grown beyond optimum level from cost point of view
- workers might lose their job if roles in new form are duplicated
- workers may have
- some assets may be sold off - wasteful

Question 5

Vertical integration

Answer 5

Firm merge at different stages of production process - broken down into 2 further types; backwards and forwards integration

Backward = firm merged with a supplier
Forward = buying another firm in same production process but closer to customer

Question 7

Conglomerate integration (diversification)
Adv + dis

Answer 7

Firm buys another firm in a completely unrelated business - firm diversifies
Adv
- spreads risk, profitable areas cross subsidies loss-making areas
- diff products success at diff parts of business
- brands gain more recognition

Dis
- lack of expertise on new areas
- brands May become diluted
- differences in cultured = conflict + low productivity

Question 8

Constraints on business growth

Answer 8

Gov regulation - ensure markets remain competitive + prevent dev of monopolies
Capacity constraints - May have insufficient machinery to expand, shortage of finance for expansion

Market constraints - limited demand, indv tastes have to be satisfied, large scale prod inappropriate

Vision constraints - owner’s attitude - family business + avoid taking on people from outside, easier to manage

State of economy - recession = demand limited, no point expanding

Question 9

Reasons for de mergers

Answer 9

focus on core business = decreased costs (AC) = increases profit margins (cost savings) + increase returns to stakeholders

• Avoid diseconomies of scale and scope (due to large scale organisation) by decreasing range of functions in a firm = achieve lower management costs

Meet demands of regulators

Question 10

economic impacts of demergers

Answer 10

producers - greater efficiency by becoming more specialised/ focused than before = lower costs improve profit margins

BUT - demerger may reduce the demand for the resulting company - reduction in rev may reduce overall profits

consumers - lower prices since more focused company reduce costs and pass onto consumers via lower prices - greater comp also pushes prices down

BUT - loss of economies of scale may INCREASE producer costs = higher prices for consumers