Growth and mergers

Question 1

Why do firms grow?

Answer 1

• Make more sales and profit
• Increase Market power
• Diversify and risk bearing economies
• Economies of scale
• Objectives of owners

Question 2

Why do firms stay small?

Answer 2

• Don’t have finance to grow
• Regulators limit growth
• Niche markets
• Diseconomies of scale
• Satisficing

Question 3

What are the types of firms:

Answer 3

Public sector: Owned by the government
Private sector: Owned by private individuals

Question 4

What is organic and inorganic growth:

Answer 4

Organic growth: When a firm grows by investing in itself to increase output

Inorganic growth: When a firm grows by acquiring or merging with another firm

Question 5

What are the pros and cons of organic growth?

Answer 5

Pros: low risk, communication disecomomies are minimised
Cons: slow growth, more expensive relative to a merger

Question 6

What is a conglomerate merger and what are the pros and cons?

Answer 6

two firms in unrelated industries merging

Pros: Risk-bearing E.O.S, cross subsidisation, not exceeding 25% of market share
Cons: Diseconomies of scale, lack of expertise

Question 7

What are demergers and why do they happen?

Answer 7

When two or more business are split into separate organisations with new ownership

• Reduced culture conflict as a result of clash in culture, lowering tension and increasing job satisfaction and productivity
• Decrease diseconomies of scale resulting in lower cost and higher profits
• Increase specialisation resulting in higher productivity, lower costs, higher output and more profit
• Firm can sell it’s division and assets to raise money resulting in higher profits which can be reinvested back into the business to increase dynamic effeciency

Question 8

What are the pros and cons of demergers?

Answer 8

Pros:
* For employees: Reduced cultruture conflict as a result of clash in culture, lowering tension and increasing job satisfaction and productivity
* For consumers: Specilisation results in higher output, lower costs and so lower prices. Can also lead to quality improving

Cons:
* For employees: Lost of job security
* For consumers: If the demerger is too small, diseconomies of scale falls too much, economies of scale will also fall, increasing LRAC so firms will charge higher prices

Question 9

What is backward vertical integration and what are the pros and cons?

Answer 9

integrating with another firm who is further away from the consumer in a different stage of the production process in the same industry

Pros: Control supply chain, improves access to raw materials, assured supply of raw materials
Cons: Regulators- bans or fines (10% of turnover), may lack expertise

Question 10

What is forward vertical integration and what are the pros and cons?

Answer 10

Forward Vertical integration- Integrating with another firm who is closer to the consumer in a different stage of the production process in the same industry

Pros: ability to block out competitors products, improves access to consumers, cut out intermediary costs
Cons: Regulation- bans or fines (10% of turnover), may lack expertise

Question 11

What is a horizontal merger and what are the pros and cons?

Answer 11

integrating with another firm in the same stage of production and industry

Pros: Internal economies of scale, rationalisation, less competition, more market power

Cons: Internal diseconomies of scale, job losses, regulators limit growth, over dependence in one market