3.3.2 Why do Firms grow Flashcards
Why do some firms stay small?
- Economies of scale may be small comparative to market size: many firms may be able to produce at the MES
- Cost of production might be higher in a certain market for larger scale producer than smaller producer
- Small firms can still be monopolists if they are very niche or have other advantages
Why do firms choose to grow?
- Economies of Scale
- Increased Market Share
- Higher salaries for managers (Divorce of ownership from control)
- Reduce risk (conglomerate integration)
What are the two types of growth?
- Internal/Organic
- External
What is internal or organic growth?
When firms increase their output through increasing the size of their labour force or capital investment
What is external growth?
Growth of a firm through mergers or takeovers
What are the four types mergers?
- Horizontal Integration
- Vertical Integration(Backwards)
- Vertical Integration (Forwards)
- Conglomerate Integration
What is horizontal integration?
Where two firms merge at the same stage of production
What is forwards vertical integration?
When a firm merges with another firm at a later stage of production
What is backwards vertical integration?
When a firm merges with another firm at an earlier stage of production
What is Conglomerate integration?
A merger between two firms in different industries, with no common interests
What are the advantages of organic growth?
It is much cheaper, easier and lower risk than external growth.
What are the advantages of vertical integration?
- May make the firm more efficient and save costs
- Increased market share leading to more control over pricing and branding
- Quality control of more steps in the process
What are the disadvantages of vertical integration?
- Decrease in performance due to lack of expertise
- Share price decrease from paying too much for takeover
- High cost of merging
- Potential failure to integrate
- Key workers may leave taking expertise with them
What are the advantages of Horizontal Integration?
- Reduction in cost due to Economies of Scale
- Increasing market share and decreasing competition
- Growth in a market where they already have expertise
What are the disadvantages of horizontal integration?
- Often poorly managed
- Often fails
- Is expensive
- Many experts leave taking their skills with them
What are the advantages of conglomerate mergers:
- Reduced risk; unreliant on the performance of a single market
- Asset Stripping
What is the disadvantage of conglomeration mergers?
Lack of expertise in the other industry
What are the constraints on growth?
- The size of the market
- Access to finance
- owner objectives
- Regulation
How is regulation a constraint on growth?
There may be laws in place which prevent firms getting too large to prevent monopolies forming.
How are the objectives of the owner a constraint on growth for a firm?
Not every owner will want to grow. They may not want the extra work or risk and are happy with their profit margins.
How is access to finance a constraint on growth?
Firms need finance to expand, often times they take out loans to get it, and banks are less likely to give out loans to small firms.
How is the size of the market a constraint on growth?
If the market is quite small, then expanding may fail because there will not be enough of a market where you expand.
What are the reasons for demergers?
- Lack of Synergies
- More valuable as multiple firms than one
- Focused Companies for greater effiiciency
How is a lack of synergies a reason for a demerger?
If one part of a firm has no impact on the efficiency and profit of another, then
