3.1.1 Business Growth/ Types of Firms

• Reasons to Stay Small


  -Maintain control

  -Avoid diseconomies of scale

  -Offer a more personal service

  -Act as a regional monopoly

  -Lack of finance
• Types of Economies of Scale


  Marketing - the more people see an advert, the lower the cost per view

  Purchasing - the more units bought, the lower the cost per unit

  Managerial - the more specialised the staff, the lower the costs

  Risk - The more products, the less risk of the firm failing

  Financial - the higher the value of a loan, the lower the interest

  Technical - the better the equipment, the more can be produced, the lower the costs
• Revenue Synergies


  Two firms can generate higher sales combined than they do individually
• Economies of Scope


  Cost efficiency is achieved by producing a range of products
• Shareholder Value


  Mergers may destroy shareholder value as the costs of the M&A may exceed the profits
• Monopsony Power


  When a single buyer dominates the market e.g. the NHS monopsony power allows firms to control their costs
• Reasons to Grow

  -Monopsony power

  -Increased security as a large firm

  -Competitive advantage

  -Meet objectives

  -Respond to technological, political, legal or consumer changes

  -Internal forces e.g. employee pressure, owners' pressure
• Stakeholder


  Anyone with an interest in the actions of a business
• Divorce of Ownership of Control


  Those who own the firm are often not the same people who control the business daily e.g. managers and owners
• Principal-Agent Problem

  An asymmetric information problem that stems from a divorce between ownership and control
• Moral Hazard


  Individuals are more willing to take risks as the failure will impact the owner more than the individual this can be hidden by exploiting the information asymmetry e.g. subprime mortgages
• Public Sector Objectives

  -Make essentials available

  -Education, health, police, defence

  -Provision of public goods