theme 3

• What is the principal agent problem?

  Arising conflict between owners + managers, due to conflicting objectives
• What is a method to resolve the principal agent problem?

  Annual meetings
• Give examples of 3 nationalised firms

  • NHS
  • Channel 4
  • BBC
• Why else are firms motivated to grow?

  • larger profits
  • market power/control
  • gain more exposure
  • efficiencies
• Why would businesses take risks?

  They are profit motivated
• What are some limits to business growth?

  • Regulatory hurdles -> Laws
  • Finding skilled staff -> Brain drain
  • Disruptive technologies -> Growth of uber/Decline in black cabs
  • Financial constraints
  • Size of potential markets
  • Controlling costs of a growing business
• What are the 2 main ways firms can grow?

  1. Organic growth
  2. Mergers and Acquisitions
• What is organic growth?

  When a firm grows internally by reinvesting profits or borrowing from financial institutions
• How can a business grow organically?

  • Increase production capacity -> capital investments
  • Advertising
  • Exporting
  • Develop a new product/service
  • Higher quality goods
  • Loyalty schemes/word of mouth
• What are mergers and acquisitions?

  When firms join together OR when a firm buys another firm
• What are some benefits of M&As?

  • Talent acquisition
  • Higher productivity
  • Larger client base
  • More profit, more saving
  • Diversification
  • Efficiency
  • Removing duplication
  • Quicker than organic growth
• What are some drawbacks of M&As?

  • Clash of business cultures and ethics
  • Lack of management expertise
  • Redundancies of workers
  • Overexpansion
  • Risks
• What is a horizontal merger?

  When 2 firms that are operating in the same industry and at the same stage of production join together
• What is horizontal integration?

  The result of a horizontal merger
• What are the advantages of horizontal integration?

  • less risk -> both of the same field
  • saves more money -> cheaper than doing it alone
  • reduces competition
  • enables diversification of products
• What are the drawbacks of horizontal integration?

  • reduced flexibility
  • risk of diseconomies of scale
  • risk of attracting scrutiny from competition authorities
• What is a vertical merger?

  When 2 firms in the same industry but of different stages of production join together.
• What are the two type of vertical integration?

  Backward and forward
• What is backward vertical integration?

  Firm A takes control of firm B which is positioned early in the production stages -> like a supplier
• What is the benefit of backward vertical integration for Firm A?

  Ensures that the firm has a stable and reliable source of raw materials, reduced dependency on external suppliers, and achieve cost savings through economies of scale
• What is forward vertical integration?

  Firm B takes control of Firm A which is positioned closer to the distribution side of the supply chain
• What are some benefits of vertical integration?

  • control over the supply chain
  • improved access to key raw materials
  • better control over retail distribution channels
• What are some drawbacks of vertical integration?

  • lost benefits of specialised expertise
  • raise competition concerns
  • rely less on external innovation
• What is conglomerate integration?

  Where 2 firms from different industries merge
• What are some benefits of conglomerate integration?

  • different industries follow the business cycle at different times -> evens out economic activity
  • potential for cost savings
• What are some drawbacks of conglomerate integration?

  EDIT
• What is a TNC?

  Firms that operate in multiple countries
• If a firm wants to gain economies of scale, will it remain small/grow?

  Grow -> economies of scale are the cost advantage that firms experience when the increase production. This will attract firms to expand + grow their businesses.
• If a firm wants to target niche markets, will it remain small/grow?

  Small -> niche markets are smaller markets with specific target audiences, often with less demand. This will force firms to remain small.
• If a firm looks into mergers and acquisitions, will it remain small/grow?

  Grow -> firms can either buy or merge with other firms, enabling them to expand
• Why might a firm choose to remain small?

  Expansion may be to expensive to do, due to a lack of financial funds
• What is a demerger?

  When 2 firms that were joined, separate
• Why might demergers happen?

  • underestimated costs of integrating management
  • computer/production systems may not be compatible
  • may be difficult to make staff cuts
  • expected gains in market share/profits dont happen
• Why might a business WANT a demerger?

  • reduce the risk of diseconomies of scale
  • focus on core businesses
  • raise money from asset prices
  • defensive tactic