2.12. Growth and Survial of Firms

Question 1

Reasons for Small Firms

Answer 1

1) The size of the market is small.
2) The firm may be in a specific niche market.
3) The firm provides customers with a service requiring personal attention.
4) The firm has only just started.
5) The owners prefer the firm to remain small.
6) Financial support from the government that is only available to small firms.
7) To be more flexible to changes in consumer demand.
8) Small firms might be more innovative.
9) Difficulties in obtaining finance for growth.
10) Many aspects of business can be contracted out e.g. marketing.
11) Small firms might be more efficient.

Question 2

Reasons for Growth of Firms

Answer 2

1) Take advantage of economies of scale, which decreases average costs of production.
2) Reduce the chance of being taken over by another firm.
3) To increase sales and market share.
4) The wishes of the owners / managers.

Question 3

Internal Growth (organic growth)

Answer 3

Business increases in size through increases sales / production

Question 4

Causes of Internal Growth

Answer 4

• Increasing production through capital investment.
• Developing new products.
• Finding new markets to sell to.
• Increasing customer base through marketing (advertising).

Question 5

External Growth

Answer 5

the takeover of other firms through integration (mergers and acquisitions)

Question 6

Advantages of External Growth

Answer 6

• Faster way to grow compared to internal.
• Helps to reduce competition.
• Increases market share.
• Gain new skills, experience and customers.
• However, it is expensive and can change company culture.

Question 7

Types of External Growth

Answer 7

1) Horizontal Integration
2) Vertical (backwards and forwards) Integration
3) Lateral (conglomerate) Integration

Question 8

Horizontal Integration

Answer 8

two firms at the same stage of the same production process join together e.g. two car manufacturers.

Question 9

Vertical Integration

Answer 9

two firms at different stages of the same production process join together

Question 10

Vertical Forwards Integration

Answer 10

a firm joins with another firm in the next stage of the production process e.g. car manufacturer and car dealership.

Question 11

Vertical Backwards Integration

Answer 11

a firm joins with another firm in the previous stage of the production process e.g. car manufacturer and component supplier

Question 12

Lateral (conglomerate) Integration

Answer 12

two firms in different industries join together e.g. car manufacturer and soft drink company.