Classification of Firms by Economic Sector MTK

Secondary Sector
Converts raw materials into finished or

Primary Sector semi-finished goods.

Includes manufacturing (cars, electronics)
Extraction of natural resources from and construction.
the earth. Adds value by transforming inputs into
Activities include farming, mining,
usable products.
fishing, and forestry.

Provides essential raw materials for Tertiary Sector

the economy.
Provides intangible services to individuals and
businesses.
Directly serves consumer and business needs.
Includes healthcare, retail, banking, education, and
entertainment.
Private Sector: Ownership & Objectives
Owned by individuals or private
organizations.
Main objective: Profit maximization.

Types of private firms:

Sole trader: One owner with full control
and responsibility.
Partnership: 2–20 owners sharing risks
and profits.
Private Limited Company (Ltd): Shares
held privately; limited liability.
Public Limited Company (Plc): Shares
traded openly on a stock exchange.
Public Sector: Ownership & Objectives

Owned and funded by the government, financed

primarily through taxation.
Main objective: Provide essential services that
may be under-provided by market forces.
Examples: Water supply, electricity boards, national
broadcasting, state hospitals, public education.
Focuses on social welfare and equitable access to
vital services.
Measuring the Relative Size of Firms
1 2

Number of Employees Market Share

A straightforward measure of a firm's scale and its capacity to The percentage of total industry sales captured by a firm. This
provide employment. It indicates the human capital involved in its metric is a key indicator of dominance within its specific market
operations. and competitive strength.

3 4

Market Capitalization Sales Revenue

The total value of a company’s outstanding shares, calculated by The total value of goods or services sold by a firm over a period. This
multiplying the share price by the number of shares. It reflects investor measures the firm's economic importance and its ability to generate
confidence and the market's perception of future growth. income.
Characteristics of Small Firms
Key Characteristics
Typically operate in local or highly specialized niche markets.
Offer customized or highly personalized products and
services.
Often owner-managed, leading to close interaction with
customers and employees.
Greater flexibility to adapt to changing market conditions
quickly.
Importance of Small Firms
Why Small Firms Matter
Promote competition: They prevent large monopolies from dominating, ensuring
fair market practices.
Encourage innovation: Small firms often introduce new ideas, technologies, and
business models faster than larger, more bureaucratic entities.
Serve specialized demands: They cater to specific needs, such as luxury goods,
tailor-made products, or unique services that larger firms may overlook.
Support local communities: They create jobs, foster local talent, and provide
essential everyday services, enriching the community's economic and social fabric.
Advantages & Disadvantages of Small Firms
Advantages
Low start-up barriers: Relatively easy and inexpensive Disadvantages
to establish.
Owner receives all profits: Provides a strong incentive Limited access to finance: Often difficult to secure
to perform well and directly enjoy the rewards of hard large loans due to perceived higher risk by lenders.
High failure rate: More vulnerable to competition,
work.
Quick decision-making: Fewer bureaucratic layers economic downturns, and market shifts.
Owner workload: Multitasking across all business
allow for rapid responses to market changes or
functions can lead to inefficiency and burnout.
opportunities.
Continuity risk: The business may struggle or cease
Personalized customer service: Fosters strong
operations if the owner is absent or incapacitated.
customer loyalty and repeat business through direct Higher average costs: Cannot benefit from economies
relationships. of scale like larger firms, leading to higher unit costs.
Better control and management: Easier to oversee
operations and manage employees in a smaller team.
How Firms Grow: Internal & External Growth
Firms can expand their operations and market presence through various
strategies, broadly categorized into internal and external growth. Each
approach offers distinct benefits and challenges.

PPA
Internal (Organic) Growth
Expansion using the firm’s own resources and
existing operations.
Usually a slower process but offers more
stability and control over the growth trajectory.
Achieved by opening new branches, launching
new products, or entering new markets
gradually.
Relies on reinvesting profits and optimizing
current capabilities.
 PPA

External (Inorganic) Growth

Growth achieved by joining with or acquiring
another firm.

Methods include mergers, takeovers, and

strategic alliances.
Allows instant access to new markets,
customer bases, technologies, and
expertise.
Can lead to rapid market dominance but also
integration challenges.
 PPA

Franchising
A specific external growth strategy where one business allows another to operate using its brand name, products, and trademarks.
This method enables rapid brand expansion while significantly reducing risk for the franchisor.
Types of Mergers and Their Effects

Horizontal Mergers
Two firms in the same industry
and same stage of production
merge (e.g., two car
Benefits: Achieve economies
manufacturers).
of scale, increase market share,
eliminate competition, and
share expertise.
Challenges: Potential for
resource duplication, job
losses, and cultural clashes
between companies.
Vertical Mergers
Firms at different stages of the
production process integrate.
Forward Integration: Merging with a
distributor or retailer (e.g., car
maker buys car dealership) for
better market access and control
over sales.
Backward Integration: Merging with a supplier (e.g.,
car maker buys tire company) to ensure quality and
cheaper inputs.
Benefits
Better quality control
Lower raw material costs
Drawbacks
Higher production costs
Higher transport costs
 Conglomerate Mergers
Firms in unrelated industries merge (e.g., a
tech company buys a food manufacturer).
Main benefit: Risk diversification across
different markets, reducing reliance on a
single industry's performance.
Potential drawback: Over-diversification
can reduce managerial focus and lead to a
lack of expertise in all areas.

Mergers significantly reshape industry structures, influencing competition levels, operational costs, and market reach. They are strategic
moves to gain competitive advantage and achieve long-term growth.
Economies of Scale: How Large Firms Reduce Costs
Economies of scale refer to the cost advantages that enterprises obtain due to their scale of
operation, with cost per unit of output decreasing with increasing scale. These can be internal or
external.
Internal Economies
Purchasing: Buying raw materials or components in bulk
lowers the cost per unit.
Technical: Investing in advanced machinery and specialized
equipment increases efficiency and output.
Financial: Larger firms can borrow money at lower interest
rates due to their perceived stability.
Managerial: Employing specialized managers improves
productivity and decision-making in specific areas.

Risk-bearing: Diversifying product lines or markets spreads

risk, making the firm more resilient.

R&D: Large firms can afford significant research and

development, leading to innovation and cost-saving
technologies.
Marketing: Large advertising budgets allow for widespread
campaigns, reducing average marketing costs per customer.
External Economies
Arise due to the growth of the industry or concentration
of firms in a specific location, rather than the size of an
individual firm.

Skilled labor pools: The availability of a large, specialized

workforce (e.g., IT workers in Silicon Valley) reduces
training costs.

Supplier networks: Proximity to specialized suppliers

reduces transport costs and ensures timely delivery.

Infrastructure advantages: Better roads, ports,

communication networks, and logistics services benefit all
firms in the area.

Industry reputation: A strong regional reputation attracts

investment, talent, and customers, benefiting all local
businesses.
Diseconomies of Scale: Why Big Firms May Become
Inefficient
While growth often brings benefits, there comes a point where a firm can grow too large, leading to
increasing average costs and reduced efficiency. This phenomenon is known as diseconomies of scale.
Diseconomies of Scale: Why Big Firms May Become Inefficient
While growth often brings benefits, there comes a point where a firm can grow too large, leading to increasing average costs and reduced efficiency. This
phenomenon is known as diseconomies of scale.

Communication Problems Coordination Difficulties Low Motivation

Too many layers of management and a complex Managing and coordinating increasingly large In very large companies, individual workers may
organizational structure can slow down decision- and diverse operations across different feel less valued, less connected to the overall
making and distort information flow, leading to departments, locations, or even countries goals, and may experience reduced job
misunderstandings and delays. becomes challenging, leading to inefficiencies satisfaction, leading to lower productivity.
and conflicts.

Cultural Clashes Over-Diversification

Especially after mergers or acquisitions, integrating different corporate When a firm expands into too many unrelated areas, it can lose strategic
cultures can create internal friction, resistance to change, and reduced focus and managerial expertise may become diluted, hindering effective
efficiency. management of all business segments.