Suggest a reason why some firms choose to grow.
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Suggest a reason why some firms choose to grow.
A reason for firms to grow is the desire to gain stronger market power to increase profits.
What is meant by economies of scale?
Economies of scale are the reductions in average costs as a firm increases its output.
True or False?
All firms aim to grow larger.
False.
Some firms intentionally choose to remain small.
What is a reason for some firms to remain small?
A reason for some firms to remain small is to offer a more personalised service and focus on non-price factors.
Define the principal-agent problem.
The principal-agent problem is the conflict of interest that develops between a company's owners and its managers as it grows larger.
What is meant by a public sector organisation?
A public sector organisation is owned and controlled by the government.
How do private sector organisations differ from those in the public sector?
Private sector organisations are owned and controlled by private individuals. Public sector organisations are owned and controlled by the government.
What is assumed to be the main objective of most private sector organisations?
The main objective of most private sector organisations is to maximise profits by operating at an output where marginal costs (MC) = marginal revenue (MR).
What are not-for-profit organisations?
Not-for-profit organisations operate to provide a service or meet a need rather than to make a profit.
True or False?
Not-for-profit organisations never sell goods or services.
False.
Not-for-profit organisations can sell goods or services and then use the profits to further their objectives.
What is meant by profit satisficing?
Profit satisificing is when business owners aim for an acceptable quality of life with a respectable level of profits rather than profit maximising.
How do principals attempt to address the principal-agent problem?
Principals attempt to address the principal-agent problem by granting share options to managers. This aligns their interests with those of the owners.
What is organic growth?
Organic growth is when firms expand internally by opening more outlets, buying better technology and employing more labour.
What does inorganic growth mean?
Inorganic growth is when firms expand through external methods like mergers, takeovers or acquisitions.
What is forward vertical integration?
Forward vertical integration is when a firm joins with another firm in the same industry at a later stage of production.
Define backward vertical integration.
Backward vertical integration is when a firm joins with another firm in the same industry at an earlier stage of production.
What is horizontal integration?
Horizontal integration is when a firm joins with another firm in the same industry at the same stage of production.
Define conglomerate integration.
Conglomerate integration is when a firm joins with another firm in an unrelated industry.
What is an advantage of organic growth?
An advantage of organic growth is that the pace of growth can be controlled and is manageable.
True or False?
Vertical integration always reduces costs.
False.
Vertical integration can lead to diseconomies of scale. This increases average costs.
What is an advantage of horizontal integration?
An advantage of horizontal integration is a rapid increase in market share.
How can the size of a market constrain business growth?
The size of a market can constrain business growth by limiting the number of potential customers especially in niche markets.
What is a disadvantage of conglomerate integration?
A disadvantage of conglomerate integration is a possible lack of expertise in new products or industries.
How can the objectives of owners constrain business growth?
The objectives of owners can constrain business growth when they prefer to expand only to a point that provides an acceptable standard of living.
What is a demerger?
A demerger is when a firm sells off at least one part of the business it owns. It may split itself into separate parts to create two or more firms.
Define diseconomies of scale.
Diseconomies of scale are the increases in average costs as a firm grows beyond its optimum size.
Why do demergers occur?
Demergers occur to reduce diseconomies of scale.
How can a company's business focus be affected by demergers?
Demergers can affect a company's business focus by enabling it to concentrate on its operations more narrowly. This could increase profitability.
True or False?
Cultural differences are a common reason for demergers.
True.
Cultural differences are a common reason for demergers.
How might demergers affect employees?
Demergers may have a negative impact on employees as some workers may lose their jobs.
How can demergers affect consumers?
Demergers may result in improved product quality and customer service which could have a positive impact on consumers.
State a possible financial gain for a business from demerging.
A potential financial gain from demerging is increased liquidity and dividend payments in the year of the demerger.
How might demergers affect efficiency?
Demergers can increase productive efficiency by lowering average costs.
Why might businesses be required to demerge?
Firms might be required to demerge to comply with the country's competition authorities. In the UK, this is the Competition and Markets Authority (CMA).
True or false?
Demergers always result in job losses.
False.
Demergers can also provide more opportunities for promotion in a smaller workforce.
What effect might demergers have on the range of products?
Demergers can have a negative impact on the product range. They can result in fewer available products.