3.1.1 Size & Types of Firms

Reasons for Growth & Reasons to Remain Small

Many firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)

Reasons Why Firms Grow

Owners/Shareholders/Managers desire to run a large business & continually seek to grow it	Owners/shareholders desire for higher levels of profit	Desire for stronger market power (monopoly) so as to increase profits
Desire to reduce costs by benefitting from economies of scale	Growth provides opportunities for product diversification	Larger firms often have easier access to finance

While many firms grow, others do not or they intentionally choose to remain small

Reasons Why Small Firms Exist

They offer a more personalised service & focus on building relationships with their customers	Unable to access finance for expansion	They provide a product that is in a niche market - smaller market size but can be very profitable
Many small firms operate in mass markets with low barriers to entry	Rapid growth can cause diseconomies of scale which can be difficult to deal with & so many owners choose to avoid these	Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing)

As firms grow, the owners (or shareholders) often appoint managers to run the business for them
There is a separation (divorce) between the owners and the managers who control the day-to-day running of the business
This divorce gives rise to the Principal-Agent problem
- E.g. Shareholders want to maximise their profits, but workers want to maximise their salaries
- E.g. Shareholders want to maximise their profits, but managers may want to maximise the number of sales over the value of the sales
The problem is exacerbated by information gaps in that the agents have a lot more information than the owners and are often able to control the flow of that infromation
One way that Principals attempt to diminish the problem is by granting share options to managers
- If managers are shareholders, then they will be likely to align their interests more with those of the owners

Public sector organisations are owned & controlled by the Government
- Their goal is not profit maximisation but to provide a service
- There are a wide variety of government owned organisations in the UK
  - Corporations like the BBC and Channel 4
  - National services such as State Schools & National Health Service Trusts
  - Local services such as Transport for Greater Manchester
  - Civil service departments such as Defence, Police, Education
  - Regulatory bodies such as the General Dental Council
Private sector organisations are owned & controlled by private individuals
- Types of ownership vary from sole trader to partners to company shareholders
- The goal of most private sector organisations is profit maximisation
  - This often causes the private sector to be more efficient than the public sector with higher levels of productivity

Most firms In the private sector exist to make a profit, even if their goal is not profit maximisation
- If they do not make a profit then they are likely to go out of business
Exceptions to this are not-for-profit organisations which also operate in the private sector
- They exist to provide a service or meet a need
- Many sell goods/services & use the profits they generate to further their objectives, e.g. The British Heart Foundation
- The government exempts them from paying direct taxes
All Charities are not-for-profit organisations and are regulated by the UK Charity Commission

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