Firms

Types of firms

Large firms

Economies of scale - refers to the lower average costs that are experienced as a firms output increases.

  • Technical, Managerial, Purchasing, Financial

Barriers to entry

  • High capital/startup costs, legal barriers, marketing, anti-competitive trade/pricing

Small firms - inverse of above

  • Lack economies of scale

  • Low barriers to entry

  • Small market

Definitions

Economies of scale - A fall in the long run average costs of production as output rises

Barriers to entry- factors which make it difficult or impossible for firms to enter an industry and compete with existing producers.

Some organisations do not aim to maximise profits

A not-for-profit organisation is a business that aims to do something other than to make profit for the owners, such as providing a public service or helping people. It needs to make enough money to cover its costs, but any surplus is reinvested into the business or used in other ways.

One example of a type of not-for-profit organisation is a charity. Businesses with charitable status are funded mainly by donations, they may also get some tax relief or grants from the government.

Another type of not-for-profit organisation is a social enterprise, whose aim to help society. Social enterprises make money by selling products or services like a traditional for-profit business, but they use their profits to benefit society. Some Examples of social enterprises include businesses such as The Eden Project, The National Trust and the Big issue

Types of growth

Organic growth

  • Growth achieved by increasing output and enhancing sales internally

External growth

  • Growth by: Merger, Takeover - can be friendly or hostile

Organic growth

Advantages

  • Less risk than external growth (e.g. through mergers and takeovers)

  • Builds on a business’ existing strengths (e.g. brands, customers)

  • Allows owners to retain large share in company

Disadvantages

  • Slow growth - shareholders may prefer more rapid growth of revenues and profits - Potential to miss out on market share if other firms are growing more aggressively

External Growth/ integration types

  • Horizontal intergration

-Firms at the same stage of production, (e.g. Ford buying Jaguar)

  • Vertical intergration

-Firms at different points in the same industry (Forward or Backward), (e.g. Tata Steel buying Jaguar)

  • Conglomerate

-Firms with no common interest becoming merged, (e.g. Mariboro and Miller brewing)

Horizontal integration

Advantages

  • Economies of scale

  • Removes competition (increases market share and increase prices)

  • Further develop market expertise

  • Control of assets/patents

Disadvantages

  • Potential diseconomies of scale

  • Danger of demotivating workforce/ reducing worker welfare/ unemployment

  • Regulators may intervene

  • Takeover usually inflates share price (jncreasing cost of a takeover)

Backward Vertical Intergration

(Buying out a supplier)

Advantages

  • Improved cost efficiency

  • Reduces potential impact of significant changes in the profitability of one industry- ‘cross subsidisation’

  • Secure supply chain (market control -potential to control sales to competition)

  • Control over product quality

Disadvantages

  • Lack of expertise

  • Danger of demotivating workforce/ reducing worker welfare/ unemployment

  • No technical economies

De-merger

  • What is a demerger?

-When a firms splits itself into two or more seperate parts to create two or more firms

Examples: BT/BT Mobile, Fosters/Treasury Wines, AOL/ Time warner, News Corp publishing/20th Century Fox

Why do a demerger?

  • Lack of synergies- no mutual benefit between two parts of a firm

  • Undervalued stock- Board may feel the companies will be better appreciated by shareholders as separate companies

  • Create better company focus - Historical drive of conglomerates fading.

Impact of a demerger

  • On the business: In the short term a demerger is a costly process. In the long run, the firms benefit if increased specialisation causes better cost efficiency and innovation. In turn, this can improve profits and strengthen the prospects of the firm.

  • On workers: the impact here is equally uncertain, some might benefit through promotion as a single firm splits in to two or more parts but in contrast some may be made redundant. The impacts are therefore unsettling to many staff.

  • On consumers: the impact is once again uncertain. If the outcome is a more cost efficient firm, there is the prospect of lower prices and an increase in consumer surplus. Welfare may also improve if increased investment culminates in new and better products through innovation. However, consumers could lose out if the demerged firms: Lose out on economies of scale, Narrow their range of products.