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

Reasons Why Firms Grow

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

Reasons Why Small Firms Exist

• 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