Firms will want to grow to be able to fully exploit their economies of scale, to benefit from a larger market share, and to make more profit.
Some firms remain small due to the market size, access to finance, owner objectives, regulation.
Divorce of owership from control happens in larger firms where the owner leaves managers and staff completely in charge of day-to-day decision making. This leads to the principle-agent problem.
The principal-agent problem is where one group, the agent, makes decisions on behalf of another group, the principal. The agent should maximise the benefits for those whom they are looking after but in practice agents are likely to maximise their own benefits. Therefore, firms end up profit satisficing instead of profit maximising.
Private sector organisations are run by individuals or groups of individuals.
Public sector organisations are owned by governments or councils.
Profit organisations: firms as they aim to maximise profits.
Non-profit organisations: may include charities.
Organic growth: when firms grow by increasing their output.
😄 sustainable, low risk. 😦slow.
Integration: merger or takeover.
Merger: when two firms agree to join under common ownership.
Takeover: when one firm buys another.
Vertical integration: same industry but different stage of production.
😄greater control, saves costs (eliminating middlemen) 😦high cost, anti-trust, high risk across supply chain.
Horizontal integration: same industry and same stage of production.
😄fast economies of scale, eliminates competition 😦anti-trust, different cultures.
Production process (forward): raw materials --> manufacturing --> final good or service.
Conglomerate integration: when firms in different industries with no obvious connections integrate.
😄spreads risk, new opportunities ☹️low economies of scale, complex.
Constraints on business growth: market size, access to finance, owner objectives, regulation.
Demergers: when a business is broken into two or more parts, so they can operate individually or be sold or dissolved.
Reasons for demergers: lack of synergies (diseconomies of scale), differing company values.
Impact of demergers: job losses, loss of economies of scale, changes in price and quality and customer service.