Firms

How are different firms distinguished

industrial sector, whether they are privately owned, size or scale of production

Firms

Firms are an organization that combines factors of production, like land, labor, capital, and enterprise for profit. Firms make decisions like what to produce, how to produce, and for whom to produce for.

Primary sector

Firms within the primary sector produce or specialize in the extraction of raw materials directly from the Earth. For example, fishing, growing crops, or mining minerals. They are often the largest sector in developping countries.

Secondary sector + examples

Firms within the secondary sector utilize raw resources from primary sectors to produce finished or semi finished goods by adding value to raw resources by manufacturing. ie. food processing, producing cars, production of clothes

Tertiary sector

Firms within the tertiary sector provide services for other businesses and individuals. They don’t produce tangible products and are often the largest sector in developed countries.

Why are tertiary sectors the largest sectors in developed countries?

Because with an increase in income, which is often prevalent in developed countries, consumers and firms spend more on services, and due to advanced technology, there is a lack in need for primary and secondary sectors. With an increase in education, there are also more available specialized services.

Private sector firms

Part of economy that is owned and run by individuals or private companies, not the government. These organizations aim to make a profit.

what are the types of firms or organizations in the private sector

sole trader, joint-stock or limited company, cooperative, charity

describe sole trader

owned by one person, and the owner is the main decision maker. The finance is from the owner’s personal savings and the owner receives any profits but is also personally responsible for any debts

describe joint-stock or limited company

owned by one or more shareholders and managed by one or more directors. It is financed by the sale of shares to shareholders. Private limited companies can only sell shares to private individuals. Public limited companies can sell shares publicly though a stock exchange. Any profits belongs to shareholders but they are not liable to repay any debts.

describe cooperative

owned by its members and managed by a board of directors. It is financed through membership fees and drawing reserves. Members receive any surplus revenue that is not added to reserves.

describe charities

owned by a private individual who registered or another organization that provides services for public benefit. It is managed by a board of trustees. It is financed by gifts and donations from people and organizations. Charities do not make profits.

state owned enterprise

A firm or trading organization that is wholly or partially owned and operated by a government primarily to carry out commercial activities in order to earn profits like postal service, power company or airline. It is used to fund public sector spending. Any losses has to be funded through taxes or other government revenues.

Nationalization

Occurs when a government takes over the onwership of a private sector organixation

Ways to measure and compare sizes of firms

Number of employees, organization, capital employed, market share

market share definition

Measures the proportion of total sales revenue that is attributable to that firm

why do firms remain small? expand

the size of their market is small

access to capital is limited

new tech has reduced the scale of production needed

some business owners may simply chooose to stay small

advantages of small firms

Small firms are easily set up (few legal requirements, can be run from home)

Owners of small firms run them everyday

• motivated to run them well since they receive all profits

• decisions can be made and communicated quickly

• closer contact with customers

• colser contact with employees

can be able to react to changes in economic and market conditions more quickly than larger firms

• owners are their main decision makers so they are able to have closer contact with customers and learn quicker, and understand buying behaviour better

  • smaller firms don’t usually have a significant amount of capital invested meaning they can change production processes and products more easily

disadvantages of small firms

owners have full responsibility everyday

• few owners have all skills necessary to run their firms

• has to work long hours

• has to close firms and lose revenue when absent

smaller firms are more vulnerable. many dont survive because

• financial resources

• competition with many other firms

• soletraders may not be able to pay off any business debts from their own personal savings

small firms have difficulty to raise capital to pay running costs or finance their growth

• banks aren’t as willing to give loans

• suppliers unwilling to sell products to small firms due to risk they cannot repay them

• sole traders cant sell shares

average cost of delivering a service or producing a product is higher since

• firms cannot buy in bulk and receive bulk purchase price discounts

• cannot afford specialist equipment

why do firms want to grow

it helps firms reduce their market and financial risk and increase economies of scale

internal growth

Internal growth involves a firm expanding its own scale of production through investments in new and additional equipment and technology, and increasing its size of its premises. This increases its fixed costs of production.

How is financed internal growth

By using profits of the firm, borrowing money from banks, and selling shares in the ownership of businesses, hence becoming a joint stock company.

external growth

external growth is when a business expands by joining with or buying other businesses, rather than growing on its own to form larger enterprises.T hsi is integration through a merger

Merger definition

mergers occur when the owners of one or more firms, usually of a similar size agree to combine their operation to form a larger enterprise.

types of mergers

horizontal merger, vertical merger (forward, backward), lateral/conglomerate merger

horizontal merger definition + benefits + disadvantages

Horizontal merger occurs between firms engaged in the production of the same type of good or service.

Due to this horizontal merger, combined businesses will have a larger market share, reducing the number of competing firms (consolidation) and achieving economies of scale.

It can be difficult to coordinate and manage productive activities due to the large number of workers.

For consumers, since larger firms can restrict market supply to raise their prices, it can be more expensive, and since there are no alternatives, this reduces the consumer’s purchasing power.

vertical merger

vertical merger occurs when firms at different stages in the supply chain merge together. There is forward and backward vertical ,ergers.

forward vertical merger

Forward vertical merger occurs when a firm merges with or acquires another firm at a later stage closer to the consumer.

benefits of forward vertical merger

Certainty of having a retailer, Can instruct the retailer not to stock products produced by rival manufacturers, Can absorb the profit made by the retailer on every sale

Backward vertical merger

Backward vertical merger occurs when a firm merges with another at an earlier stage in its supply chain.

benefits of backward vertical mergers

Certainty of regular and exclusive supplies. Reduces risk of production being held up by last deliveries. Can control cost and quality of supplies. Can absorb profits of the farm.

disadvantages of vertical integration

Takeover requires a significant amount of capital. if firms differs significantly in size, there is excess capacity. if a firm has control over its supply chain in one region, it cannot easily relocate to parts of its supply chain to cheaper locations. running a successful manufacturing firm requires different sets of skills to a producer or retailer of natural resources. Different firms may have different ways of working and interacting with employees and customers.

lateral integration

Also known as conglomerate merger occurs between firms that are involved in unrelated activities and industries. This creates firms called conglomerates and produce a wide range of products.

benefits of lateral/conglomerate merger

Can expand consumer base, reduce market risks due to the diverse range, able to achieve economies of scale, Can share ideas and innovations

Disadvantages of laterla integration

Difficult to govern and control a much larger firm with different businesses, they may lack the skills to manage efficiently. Requires a lot of effort to understand products and operations of each business. This can result in the loss of focus. Workforce issues can occur due to different industries and different skills, attitudes and wages.

Economies of scale

Economies of scale are cost advantages reaped by companies when production becomes efficient. this occurs when average costs of running a business falls as a firm increases its output and size.

Internal economies of scale + factors

Internal economies of scale refers to the cost advantages a business experiences as it grows in size through decisions by entrepreneurs.

Marketing, purchasing, financial, technical, risk-bearing, managerial

marketing

marketing occurs when businesses grow and the average cost per unit of advertising falls.

Purchasing + why does this occur for larger firms

Purchasing occurs when a business buys goods in bulk and benefits from discounts. Larger firms receive discounts for bulk purchases since it is cheaper for suppliers to make one large delivery than several small deliveries to numerous firms.

Financial + why does it occur

Financial occurs on a large business can borrow money at a lower rate of interest on a small business. Larger firms are usually more financially secure and can offer more assets as collateral for loans

Technical + why it can’t occur for smaller firms

Technical occurs when a business invest in new technology and is able to increase production and efficiency has a production cost per unit decreases. Smaller firms lack the financial resources and scale of production is too small to justify investments

Risk bearing

Risk bearing occurs when a business produces a wide range of products, meaning it isn't dependent on just one product.

Managerial

Managerial occurs when a large firm can employ specialist workers to complete tasks to reduce time although it increases cost per unit.

External economies of scale

External economies of scale refer to the cost advantages that benefit all firms within an industry or location as the entire industry grows

How else can the average cost of production be reduce in external economies of scale

Access to skilled workers → easier since other firms has already trained workers with skills needed

Shared infrastructure benefits → cost advantages since they may operate in proximity to each other and collectively use common infrastructure

Supplier benefit from economies of scale → Suppliers can grow with the growth of the industry. Can lower the prices of the goods and the services they supply to the industry without cutting their profits.

Benefit from specialist service providers → Specialist service providers supplies specialist workers and equipment to larger industries. No point for smaller industries since it is not profitable.

Diseconomies of scale + problems

Diseconomies of scale occurs when a firm grows so large that its average cost per unit of output starts to increase.

Management, labor, supply constraints, skill shortages, regulatory risks

Management diseconomies

Management diseconomies refers to when controlling and coordinating production becomes difficult with diverse products in many locations

Labor diseconomies

Labour diseconomy refers to senior managers finding it difficult to stay in touch with the workers since the firm has grown so much. This may result in workers feeling undervalued, reducing motivation, and causing labor disputes.

Supply constraints

Supply constraints refers to firms that grow too large in size and struggle to get enough materials, components, or power. This refers to higher costs for resources and potential shortages that can slow down production.

Skill shortages

Skill shortages refers to the difficulty of attracting enough skilled workers since as a firm expands it may require more skill specific or advanced skills in the local talent pool of the workforce may be exhausted.

Regulatory risks

Regulatory risks refer to the government attention and regulations that can be faced by prominent firms. This is because smaller firms are unable to compete with them so larger firms dominate the market supply and can reduce the pricing power of consumers.