4.3 – The Growth of Firms Flashcards
Name the measures of firm size.
Number of employees: The more the no.of workers employed, the larger the business is likely to be
Capital employed: this is the money invested in the business in productive assets to produce goods and services and generate revenue.
Market share: Market share is the total market sales a firm is able to capture.
Organization: The internal organization- how the departments are organized- can tell a lot about it’s size.
What are the two ways of growth?
Internal Growth/Organic Growth
External Growth
What is Internal Growth?
This involves expanding the scale of production of it’s existing operations. This can be done by purchasing more machinery/equipment, opening more branches, selling new products into the market, expanding business premises, employing more workers etc.
What is External Growth?
This involves two or more firms joining together to form a large business. This is called integration.
What are the 2 methods of external growth?
Mergers - occurs when the owners of two or more companies agree to join together to form a firm.
Takeover - happens when a company buys enough shares of another firms that they can take full control.
What are the types of integration?
Horizontal Integration - integration of firms engaged in the production of the same type of good at the same level of production.
Vertical Integration - integration of firms engaged in the production of the same type of good but at different levels of production (primary/secondary/tertiary).
Lateral/Conglomerate integration - occurs when firms producing different type of products integrates. They could be at the same or different sage of production.
What are the 2 methods of Vertical Integration?
Forward vertical integration: when a firm integrates with a firm that is at a later stage of production than theirs.
Backward vertical integration: when a firm when a firm integrates with a firm that is at an earlier stage of production than theirs.
What are Economies of Scale?
Cost saving from a large-scale production
What are Internal Economies of scale?
Are decisions taken within the firms that can bring about economies (advantages)
What are the Internal Economies of scale that a business can benefit from?
Purchasing economies: Large firms can be buy raw materials and components in bulk because of their large scale of production.
Marketing economies: Large firms can afford their won vehicles to distribute their products, which is much cheaper than hiring other firms to distribute them
Financial economies: Banks are more willing to lend to lend money to large firms, since they are more financially secure
Technical economies: Large firms are more financially able to invest in good technology, skilled workers, machinery, etc.
Risk-bearing economies: Large firms with a high output can sell into different markets (even overseas).
What are External Economies of scale?
External economies of scale occur when firms benefit from the entire industry being large.
What are the External Economies of scale that a business can benefit from?
Access to skilled workers: Large firms can recruit workers trained by other firms.
Ancillary firms: They are firms that supply and provide materials/services to larger firms
Joint marketing benefits: When firms in the same industry locates close to each other, they may share an enhanced reputation and customer base.
Shared infrastructure: A development in the infrastructure of an industry or the economy can benefit large firms.
What are Diseconomies of scale?
Diseconomies of scale occur when a firms grows too large and average costs start to rise.
What are some Diseconomies of scale that may affect a business?
Management diseconomies: Large firms have a wide internal organization with lots of managers and employees. This makes communication difficult and decision-making very slow.
Too much output may require a large supply of raw materials, power etc. which can lead to shortage and halt production, increasing costs.
Large firms may use automated production with lots of capital equipment. Worker operating these machines may feel bored in doing the repetitive tasks, and thus demotivated and less cooperative
Agglomeration diseconomies: this occurs when firms merge/acquire too many different firms producing different products, and the managers and owners can’t coordinate and organize all activities
More shares sold into the market and bought means more owners coming into the business. Having a lot of owners can lead to a lot of disputes and conflicts among themselves.
A lot of large firms can face diseconomies when their products become too standardized and less of a variety in the market.
Why do some firms remain small?
The size of their market is small: Business like hairdressers, restaurants, cafés, hotels that provide personalized goods and services, can only supply to a small market.
Access to capital is limited, so owners can’t grow the firm.
Owner(s) prefer to stay small: A lot of entrepreneurs don’t want to take risks by growing the firm and they are quite satisfied with running a small business.
