The Economics of Organisations and Strategy

Chapter 5 Growth and Entrepreneurship

The Economics of Organisations and Strategy The purpose of this tool is to allow you to test your understanding of basic microeconomic concepts and also to help you build confidence. These notes are by no means exhaustive, and it is recommended that you refer to the chapter for a fuller understanding of the issues. To use the tutorial, read the question(s), and decide upon the most appropriate answer, by clicking on the A, B, C or D button. Questions can be skipped by clicking on the appropriate button at the bottom or tabs at the top of the screen. You can always end the session by clicking on the ‘End’ button. End Welcome to the Economics of Organisations & Strategy Tutorial and Revision Presentation

The Economics of Organisations and Strategy Chapter 5 – Question 1 End B C AD C In the diagram a revenue maximising firm operating under a minimum profit constraint would produce output: Minimum profit F Total profit E C Total revenue D A Total costs B £ Q 2 Q 1 Q 3 Output Q 0 Q1;Q2;Q3;Q4.

The Economics of Organisations and Strategy Chapter 5 - Question 2 Diversification is not the same as growth. Growth is a dynamic process whereby scale is steadily increased over time. Diversification can facilitate growth because: End B C A D It can be justified by economies of scope; Demand for a single product is unlikely to grow continuously; It may involve unrelated products; Because it generates cash for investment. B

The Economics of Organisations and Strategy Chapter 5 - Question 3 A supply side perspective on firm growth sees the sources of firm growth as being driven by a process of: End B C A D Aggrandisement on the part of senior managers; Hiring increased human resources; Heightened rivalry in imperfectly competitive markets; Resource accumulation that yields services surplus to current needs. D

The Economics of Organisations and Strategy Chapter 5 - Question 4 To the extent that firms can pursue more than one growth path, decisions should be guided by: End B C A D The need to preserve organisational coherence and lower overall unit costs; The entrepreneurial skills of its managers and their desired products; The need to preserve organisational coherence and increase market share; The entrepreneurial skills of its managers and the need to preserve organisational coherence. D

The Economics of Organisations and Strategy Chapter 5 - Question 5 There are many definitions of the word entrepreneur. For Joseph Schumpeter an entrepreneur is someone who: End B C A D Is a disruptive, destabilising force, destroying what has gone before; Is prepared to take risks to exploit opportunities others neglect; Has the energy and drive to create large scale businesses; Puts their own capital into new ventures. A

The Economics of Organisations and Strategy Chapter 5 - Question 6 Entrepreneurs have a particular role in new start ups. Many new start ups are more correctly described as ventures rather than firms because: End B C A D They are small scale and employ very few people; Although they are growing they have yet to generate revenues; The new products or processes are being incubated within larger companies; They rely on venture capital to maintain growth. B

The Economics of Organisations and Strategy Chapter 5 - Question 7 The Marris growth model is founded on the theory that firm growth: End B C A D Involves diversification which is funded by retained profits; Involves diversification which in turn drives up the profit ratio; Does not necessarily involve diversification, but it must be funded; Involves diversification but always at the cost of declining profits. A

The Economics of Organisations and Strategy Chapter 5 - Question 8 End In this representation of Marris’ growth model, a move between B and C represents B C A D Growing management discretion; Growing shareholder dissatisfaction. A declining need for retained profits; Increasingly successful diversification; D Diversification /K/K A B C

The Economics of Organisations and Strategy Chapter 5 - Answer 1 Correct answer: The revenue maximising firm will wish to get as near to producing output Q 2 as possible. They are prevented from doing so because their shareholders require a minimum level of profits. Hence the firm will locate at point F on its total profit curve which maximises revenue subject to the constraint of delivering the minimum required level of profitability. EndReturn Next

The Economics of Organisations and Strategy Chapter 5 - Answer 2 End Next Return Correct answer: For a firm selling a single product, growth requires growing demand. In the short-run the firm may trade profits for price cuts to increase sales or to fund marketing campaigns, but either course of action has only a limited impact. Sooner or later a single product firm operating in a mature market who wishes to continue growing must seek alternative sources of revenue by diversifying.

The Economics of Organisations and Strategy Chapter 5 - Answer 3 Correct answer: The supply side perspective on firm growth owes much to Edit Penrose and her viewpoint that a firm, in carrying out its operations, is engaged in a process of learning that manifests itself in the firm accumulating resources – particularly knowledge resources. Eventually this stock of resources exceeds the needs of current operation. Such an accumulation of knowledge opens up realistic, profitable opportunities for diversified growth. End Next Return

The Economics of Organisations and Strategy Chapter 5 - Answer 4 Correct answer: The main concern for a firm that grows by means of diversification – particularly unrelated diversification – is that it will threaten its organisational coherence making it more difficult to align and motivate its workforce. But also as diversification involves moving into new markets the firm’s senior managers need the skills of an entrepreneur to seek out and exploit these new opportunities. End Next Return

The Economics of Organisations and Strategy Chapter 5 - Answer 5 Correct answer: Schumpeter linked his concept of an entrepreneur to progress in general. Schumpeter would find much in common with Penrose and her idea that growth is the product of the accumulation and exploitation of surplus knowledge. But for Schumpeter this new knowledge in the hands of an entrepreneur becomes a process of creative destruction. It is the entrepreneur who destroys what has gone before and replaces it with new products or processes. End Next Return

The Economics of Organisations and Strategy Chapter 5 - Answer 6 Correct answer: Many start-ups have long lead times before productive activity generates products for scale. This is particularly true for high tech or science based start-ups. The scale and growth of such firms has to be measured in terms of assets or employment rather than revenue or profit and such enterprises are known as ventures. End Next Return

The Economics of Organisations and Strategy Chapter 5 - Answer 7 Correct answer: Marris starts from a managerial perspective, whereby managers have discretion over the retention of profits for investment in diversification and also the areas and pace of diversification. Thus, for Marris, the rate of growth depends on the firm’s ability to raise the necessary funds as well as being in a position to choose sufficient diversification opportunities. End Next Return

The Economics of Organisations and Strategy Chapter 5 - Answer 8 Correct answer: the Marris model hypothesises that at first diversification is accompanied by an increasing profit rate, in part driven by energetic, entrepreneurial managers exploiting the firm’s surplus resources. But beyond some point – point A in the diagram – the pace of diversification necessary to secure faster growth starts to threaten organisational coherence and the profit rate starts to decline. At first, in a world of asymmetric information, the managers can continue to exercise their discretion – represented by a move between A and B – but eventually the falling profit rate becomes a source of dissatisfaction amongst shareholders and in the extreme could lead to a hostile takeover. End Next Return

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