Firms

Classification criteria:
Market Capitalisation (stock market value,
Private/ Public sector
calculated by multiplying total number of shares in
Primary/ Secondary/ tertiary
market by their current share price.
Number of employees
Sale revenue (unit price of product * quantity sold)
Market share

Used to classify relative size

View advantages and disadvantages of small businesses (sole traders) in business section

Private sector: sector of economy owned & controlled by individuals or groups;

- Sole traders & partnerships
o Unlimited liability
o Any profits are classified as income, and thus, taxed
- Private Limited Companies
o Own legal entity
o Limited liability
o Shareholders are owners, but cannot raise capital on stock market (cannot sell shares
to public).
- Public limited Companies
o Same as Private Limited, except shares can be sold publically
o Face greater insecurity (open to hostile takeovers)
o Can raise substantial capital through investors
o Strict regulatory controls from govt

Public sector: sector of economy owned and controlled by govt

- State education
- NHS
- Police, army, navy, etc

They;

o Provide services to society, making essential services available for all

o Provide services not provided by private sector
o Provide unchargeable services (street lights, roads)

Sales turnover or revenue;

High sales turnover suggests firm is large. However, could be misleading
- Mass markets are likely to have high volume sales at low prices
- Niche market businesses may have low volume sales for high prices
Capital employed;
- Larger businesses make greater long-term investments into capital
Market capitalization;
- PLC’s are valued by the worth of the business on the stock market (share price * number
of shares)
How can the government influence markets or businesses?
- Subsidies
- Adding taxes to foreign products to lift prices & make domestic products more
appealing
- Higher taxes/ regulations can limit entire industries
- Fiscal policy: dropping/ raising interest rates
Causes of growth of firms:
- Internal growth: when firms expand using their own resources. (e.g. increasing number
of branches, operating internationally)
- External growth: when expansion involves another organisation
o Mergers: occurs when 2 or more firms join to form just 1
 Horizontal mergers: when 2 or more firms in the same industry
integrate
Higher market share Duplication of resources leads to people
Gain skilled employees losing their jobs, which may lead to anxiety,
Operate with fewer demotivated staff, fall in productivity.
Larger firm may lead to diseconomies of
employees
scale.
Reduced cost of production
Culture clashes between merged employees
Economies of scale jeopardizes communication & efficiency.

 Vertical mergers: when a firm from one economic sector (primary etc)
merges with a firm at a different stage of production.
 Backward vertical mergers: (i.e. tertiary with secondary,
secondary with primary, tertiary with primary)
Firms in tertiary/ secondary have control over
quality of raw resources they are provided with.
 Price of raw materials/ manufactured goods falls
as company doesn’t need to buy them from
external sources.
Competitive edge through blocking competitors
from gaining access to scarce resources = becomes
monopoly
Gains access to production units, thus, can market
itself differently & maintain differentiation

Increases total cost of operation due to operating

more land, labour, capital.
Transport costs increase
Huge investment
Lack of quality due to low competition

 Forward vertical mergers: expanding a business operation to take control of

products distribution (primary merges with secondary, secondary to
tertiary, primary to tertiary)
Increase market share through eliminating costs involved in
transportation of goods to final consumers (can use in-house
distribution, special offers = increase sales)
Independence from third parties through gaining control over
distribution
Ensures distribution quality through replacing third party channels of
distribution

Inefficiencies (diseconomies of scale)

Higher costs if mismanaged activities
Loss of focus on initial purpose of business

 Conglomerate mergers: 2 or more firms from unrelated areas of business/

different economic sectors integrate to create a new firm
Diversification of business = increased chance of survival because can
float
Improves customer base
Economies of scale
Utilization of excess cash through investing this cash in another
company when a business does not have an opportunity to expand in
its sector.
Utilization of human resources

No past experience about functionalities of merged firms = severe mismanagement

and disorganization
Shift in focus = poor quality products in all sectors
Complication in employee relationships and work behaviour
 o Takeovers: may be hostile or agreed between the firms, when a firm buys the
majority stake (shares) in another business
o Franchising: when a person or business buys a license to trade using another
firm’s name, logos, brands, and trademarks

Economies & Diseconomies of scale:

Economies of scale are cost-saving benefits reaped due to the production process being
more efficient as the production operations increase in size, thus decreasing the CPU and
making them more competitive due to decreased prices. This is because the fixed costs are
spread over more units.
Internal economies of scale External economies of scale
cost savings that arise from within the business as cost savings that arise from factors outside the
it grows business e.g. location, labour pool
- Bulk buying (cost falls when bought in - Proximity to related firms: A clothing
large quantities) manufacturer will gain EOS from being close
- Technical economies of scale from to fabric/zipper/button manufacturers
purchasing automated equipment. Large because low transport cost
firms also produce in large quantities, so - Availability of skilled labour
cost of machinery can be spread across - Reputation of area: provides all firms with
higher quantity of products free publicity & exposure = more workers
- Financial economies of scale since banks with necessary skill flock to area = lower
more willing to lend money to large firms recruitment costs
bcs not risky - Access to transportation networks: facilitate
- Managerial economies of scale when large efficient transportation of finished goods
Diseconomies of scale:
… occur when average costs of production start to increase as the size of a firm
increases:

Reasons:

- Communication issues: a large firm may have too many branches that it cannot control or
communicate with effectively = decision making slows due to large number of people in
communication chain.
- Demergers: clash or organizational cultures may lead businesses to demerge.
- Large business = need for more employees/ factories/ capital to accommodate increased level of
production. This will add to TC of production = AC of production will rise.
- Workers within large organization feel detached/ don’t feel as if they are a part of the business = lack
of motivation = decreased productivity = AC rise.
- Business becomes too diverse & operates in areas in which it has less expertise. Reduced control &
co-ordination = increase costs.
- Bureaucracy: rigid rules & regulations = stifled creativity and negativity in workforce
- Lack of control