To benefit from economies of scale
To hold a greater market share
To have more security
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Why would firms want to remain small?
Contraints on growth:
Owner objectives
Limited access to finance
Regulation
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What is the principal agent problem?
Separation of ownership and control - agents act on behalf of principals and may maximise their own benefits
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What does the principal want?
Maximised dividends, therefore want to profit maximise
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What do the agents want?
Maximised salaries, therefore want to revenue maximise
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What is the public sector?
Owned and controlled by local/central government
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What is the private sector?
Owned and run by individuals
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What is organic growth?
Firms growing by increasing output
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What is integration?
When firms grow through amalgamation, merger or takeover
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What is vertical integration?
Integration of firms in the same industry but at different stages in the production process
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What is vertical forward integration?
Toward consumer side
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What is vertical backward integration?
Toward supplier
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What is horizontal integration?
Integration of firms in the same industry at the same stage of the production process
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What is conglomerate integration?
Integration of firms in different industries with no obvious connections
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What are the advantages of organic growth?
Maintained control
Integration can be expensive, time consuming and high risk
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What are the disadvantages of organic growth?
Can be too slow
Difficult to get new ideas
Other firms may have assets or access to a new market which are unobtainable through organic growth
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What are the advantages of vertical integration?
Increased potential for profit
Less risk - sellers do not have to worry about buyers and vice versa
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What are the disadvantages of vertical integration?
Firms may have limited expertise in another part of the production process
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What are the advantages of horizontal integration?
Reduces competition and increases market share
Firms able to specialise and rationalise
Firms will already have expertise
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What are the disadvantages of horizontal integration?
Increased risk - failure means there is nothing to fall back on
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What are the advantages of conglomerate integration?
Useful for firms where there is no room for organic growth
Redducedd risk - if one industry fails, the other keeps the firm alive
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What are the disadvantages of conglomerate integration?
Either firm may have limited expertise in the other firm's industry
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What is a demerger?
When a single business is broken down into two or more components
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What are the reasons for demergers?
Lack of synergies
Value of the company/share price
Focussed companies
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How do lack of synergies cause a demerger?
When different parts of the company fail to make each other more efficient
Managers can be splitting time between different areas, causing diseconomies of scale
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How does the value of the company/share price cause a demerger?
Separate parts of the company:
- being worth more than the company combined
- operating better than other and have potential to grow
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How does focussed companies?
Management haven limited time and skills
Management may be better placed when focussing on individual markets
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What are the impacts of a demerger on workers?
May be promoted as separate firms need their own managers
May become unemployed
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What are the impacts of a demerger on businesses?
May lead to higher efficiency + innovation as focus is more concentrated
May lead to loss of economies of scale
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What are the impacts of a demerger on consumers?
May lead to cheaper prices and better quality from increased efficiency
May lead to higher prices and reduced quality from decreased efficiency
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Other cards in this set
Card 2
Front
Why would firms want to remain small?
Back
Contraints on growth:
Owner objectives
Limited access to finance
Regulation
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