Firms

• Primary Sector: Contains firms that extract materials from the Earth

  Secondary Sector: Contains firms that manufacture goods, changing raw materials into finished products

  Tertiary Sector: Contains firms that provide services to general public
• Types of private sector firm:

  • Sole trader: Owned and controlled by a single person
  • Partnership: Owned by two and twenty people with share ownership and risk-taking
  • Private limited company: Owned by shareholders who can't buy/sell shares without consent of other shareholders
  • Public limited company: Owned by shareholders who can freely buy/sell shares on stock exchange
• Relative size of firms:

  • Number of employees
  • Market share
  • Market capitalisation of a firm
  • Sales revenue of a firm
• Small firms:

  • Serve as competition
  • Only local seller and provider in a remote area
  • Provides personal service to customers
  • Able to adapt quickly to consumer tastes and preference
• Advantages of small firms:

  • Few legal formalities exist to set up
  • Owner receives all profit
  • Being firm's own boss
  • know customers on personal level
  • Easier to manage and control
• Disadvantages of small firms:

  • Limited start-up capital
  • Largest risk of business failure
  • Depends on ability and commitment of owners
  • Suffer from lack of continuity
  • Higher unit costs of production
• What is internal growth?

  When a firm expands its scale of production using their own resources
• What is external growth?

  When expansion involves another organisation such as mergers, takeovers and franchises
• What is a merger?

  Occurs when two or more firms join together to form one firm
• What is a takeover?

  Occurs when a firm is taken over by another firm
• What is franchising?

  Involves a person or business buying a license to trade using another firm's name, logos, brands and trademarks
• Types of merger:

  1. Horizontal
  2. Vertical
  3. Conglomerate
• What is a horizontal merger?

  Occurs when two or more firms in the same industry integrate
• Horizontal merger advantages

  • Higher market share
  • Gaining skilled employees
  • Operate with fewer employee
  • Take advantage of economies of scale
• Horizontal merger disadvantages

  • May be duplication of resources
  • May face increasing costs arising from diseconomies of scale
  • May suffer from culture clashes
• Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain.

  Backward vertical integration involves a merger/takeover with a firm further backward in the supply chain
• Benefits of backward vertical integration:

  • Firm in secondary sector has control over quality of raw materials
  • Price of raw materials falls
• Drawbacks of backward vertical integration

  • Costs in primary sector increase
  • Transport costs increase
• What is a conglomerate merger?

  Occurs when two or more firms from unrelated areas of business integrate to create a new firm
• What is economies of scale?

  Cost-saving benefits of large-scale operations which reduce average costs of production
• What is internal economies of scale?

  Economies of scale that arise from internal organisation of the business
• What is external economies of scale?

  Economies of scale that arise from factors outside of the firm
• Internal economies of scale:

  • Bulk buying
  • Technical
  • Financial
  • Managerial
  • Risk-bearing
  • Research and development
  • Marketing
• External economies of scale:

  • Proximity related to firms
  • Availability of skilled labour
  • Reputation of geographical area
  • Access to transportation networks
• What is diseconomies of scale?

  Occur when average costs of production start to increase as the size of a firm increase
• Reasons for increase in average costs of production:

  • Communication issues arise
  • Clash of organisational cultures
  • May be necessary to employ more employees
  • Workers may find it difficult to feel part of a large firm which reduces productivity
  • Business may be too diverse and operate in areas it has less expertise in