3.3.2 Why do Firms grow

Question 1

Why do some firms stay small?

Answer 1

• 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

Question 2

Why do firms choose to grow?

Answer 2

• Economies of Scale
• Increased Market Share
• Higher salaries for managers (Divorce of ownership from control)
• Reduce risk (conglomerate integration)

Question 3

What are the two types of growth?

Answer 3

• Internal/Organic

- External

Question 4

What is internal or organic growth?

Answer 4

When firms increase their output through increasing the size of their labour force or capital investment

Question 5

What is external growth?

Answer 5

Growth of a firm through mergers or takeovers

Question 6

What are the four types mergers?

Answer 6

• Horizontal Integration
• Vertical Integration(Backwards)
• Vertical Integration (Forwards)
• Conglomerate Integration

Question 7

What is horizontal integration?

Answer 7

Where two firms merge at the same stage of production

Question 8

What is forwards vertical integration?

Answer 8

When a firm merges with another firm at a later stage of production

Question 9

What is backwards vertical integration?

Answer 9

When a firm merges with another firm at an earlier stage of production

Question 10

What is Conglomerate integration?

Answer 10

A merger between two firms in different industries, with no common interests

Question 11

What are the advantages of organic growth?

Answer 11

It is much cheaper, easier and lower risk than external growth.

Question 12

What are the advantages of vertical integration?

Answer 12

• 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

Question 13

What are the disadvantages of vertical integration?

Answer 13

• 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

Question 14

What are the advantages of Horizontal Integration?

Answer 14

• Reduction in cost due to Economies of Scale
• Increasing market share and decreasing competition
• Growth in a market where they already have expertise

Question 15

What are the disadvantages of horizontal integration?

Answer 15

• Often poorly managed
• Often fails
• Is expensive
• Many experts leave taking their skills with them

Question 16

What are the advantages of conglomerate mergers:

Answer 16

• Reduced risk; unreliant on the performance of a single market
• Asset Stripping

Question 17

What is the disadvantage of conglomeration mergers?

Answer 17

Lack of expertise in the other industry

Question 18

What are the constraints on growth?

Answer 18

• The size of the market
• Access to finance
• owner objectives
• Regulation

Question 19

How is regulation a constraint on growth?

Answer 19

There may be laws in place which prevent firms getting too large to prevent monopolies forming.

Question 20

How are the objectives of the owner a constraint on growth for a firm?

Answer 20

Not every owner will want to grow. They may not want the extra work or risk and are happy with their profit margins.

Question 21

How is access to finance a constraint on growth?

Answer 21

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.

Question 22

How is the size of the market a constraint on growth?

Answer 22

If the market is quite small, then expanding may fail because there will not be enough of a market where you expand.

Question 23

What are the reasons for demergers?

Answer 23

• Lack of Synergies
• More valuable as multiple firms than one
• Focused Companies for greater effiiciency

Question 24

How is a lack of synergies a reason for a demerger?

Answer 24

If one part of a firm has no impact on the efficiency and profit of another, then

Question 25

What is the impact of a demerger on the businesses?

Answer 25

If the demerger leads to specialisation, they will benefit from greater efficiency so lower costs

Question 26

What is the impact of a demerger on workers?

Answer 26

Many will lose jobs due to increased efficiency making them redundant. Some will benefit from promotions due to need for management in the seperate firms

Question 27

How will consumers be impacted by a demerger?

Answer 27

They will benefit from decreased prices if the demerger results in greater efficiency. They will lose out if the demerged firms raise prices due to focus on profit maximisation