3.1

• What are some reasons why firms tend to grow?


  To make more money, gain monopoly power, and for greater security
• How do economies of scale benefit a growing firm?


  They help decrease costs of production
• What is the relationship between a firm's growth and its revenue?


  Growing firms can sell more goods and therefore make more revenue
• How does a larger firm's market share influence its pricing power?


  A larger firm can influence prices and restrict market entry for others
• What is monopsony power and how does it relate to larger firms?

  Monopsony power allows firms to reduce costs by driving down raw material prices
• Why do larger firms have more security compared to smaller firms?


  They can build up assets and cash for financial difficulties
• What are some constraints on growth that may cause firms to remain small?

  The size of the market, access to finance, owner objectives, and regulation
• What is the principal-agent problem in large firms?


  It arises from the separation of ownership and control between shareholders and managers
• Who owns a firm in the context of the principal-agent problem?


  Shareholders
• What role does the Board of Directors play in a firm?

  They oversee the business and represent shareholders
• How can shareholders influence the Board of Directors?


  By voting directors onto and off the Board at the AGM
• What is the main aim of shareholders in a firm?


  To maximize the returns on their investment
• What do directors and managers typically aim to maximize?


  Their own benefits
• What does it mean for a firm to profit satisfice?


  To run the firm to meet minimum profit levels rather than maximizing profits
• How can the principal-agent problem be mitigated?


  By giving managers shares or linking bonuses to profits
• What was a significant outcome of the Enron Scandal?


  Share prices fell from nearly $100 to less than $1
• What does the private sector refer to in the UK economy?


  The part of the economy owned and run by individuals or groups
• What is the main aim of public sector organizations?


  To provide services for UK citizens, not primarily to make a profit
• How can private sector organizations be categorized?


  Into for-profit and not-for-profit organizations
• What is the long-term goal of most private sector organizations?


  To make money
• What do not-for-profit organizations aim to maximize?


  Social welfare and helping individuals and groups
• What significant corporate action did Pepsi take in 1997?


  Pepsi announced a demerger of its Pizza Hut, KFC, and Taco Bell restaurants
• What are the reasons for demergers?


  • Lack of synergies
  • Value of the company/share price
  • Focused companies
  • Avoiding attention from competition authorities
• What does lack of synergies mean in the context of demergers?


  Different parts of the company do not impact each other positively
• Why might a company demerge due to the value of the company/share price?


  Separate parts may be worth more than the combined company
• How can focused companies lead to greater efficiency?


  Management can concentrate on individual markets, improving skills and knowledge
• What impact can demergers have on workers?


  Workers could gain promotions or face job losses
• How can demergers affect businesses?


  They may become more efficient but could lose economies of scale
• What potential effects can demergers have on consumers?


  Consumers may gain from better products or lose from higher prices
• What are the advantages and disadvantages of diversification for firms?

  Advantages:

  • No room for growth in the present market
  • Reduces risk from industry failures
  • Easier expansion for individual parts

  
  

  Disadvantages:

  • Entering markets with no expertise
• What is a potential disadvantage of diversification for firms?


  Entering markets in which they have no expertise
• What is the motivation for firms to reduce quality or range of goods?


  To increase profits
• Why is conducting extensive market research important for firms?


  It helps them remain market leaders in relevant industries
• What are the advantages of diversifying product range for firms?


  • Useful when there is no room for growth in the current market
  • Reduces risk as failure in one industry can be offset by success in another
  • Facilitates easier expansion of individual parts of the business
• What are the disadvantages of diversifying product range for firms?

  • Firms may enter markets where they lack expertise
  • This can be damaging for the business
• What are the constraints of business growth?


  • Size of the market limits mass production
  • Access to finance can restrict growth
  • Owner objectives may limit desire for growth
  • Regulation can prevent businesses from expanding
• How does the size of the market constrain business growth?

  A limited market size restricts mass production as goods may not be bought
• What are the two main ways firms use to finance growth?

  Retained profits and loans
• What can happen if firms do not make enough profit?


  They may not be able to use retained profits for growth
• Why might banks be unwilling to lend to smaller businesses?


  They may see them as high risk