growth of firms

Question 1

why might a firm want to grow

Answer 1

• to outsmart competitors
• to build a brand image
• to increase market share by increasing sales, and then make more profit in the long run
• to be more able to survive economic downturns
• to utilise economies of scale and lower prices

Question 2

how might a firm grow

Answer 2

Internally or externally

Internally
- organic growth within the firm

Externally
- horizontal integration
- vertical integration
- conglomerate

Question 3

what is horizontal integration

Answer 3

• buying another firm that produces the same thing/ something similar

Question 4

what is vertical integration

Answer 4

• when you join with or takeover a firm which works at a different stage of the production process, in the same industry.
• forwards vertical integration - towards the consumer
• backwards vertical integration - towards the supplier of raw goods

Question 5

what is conglomerate integration

Answer 5

• joining with a firm in a completely unrelated industry

Question 6

explain internal growth

Answer 6

• where a firm grows naturally by reinvesting profit or borrowing to expand its production process
• e.g., gail’s growing and setting up a chain

Question 7

what are the costs/benefits of horizontal integration

Answer 7

benefits
- able to take advantage of economies of scale
- know what you’re doing, as have merged with a company producing a similar good

costs
- risk is not spread out - decline in car industry, after horizontal integration between two car manufacturers, will cause damage to both companies
- conflict of interest between the two companies - might have different business objectives which weren’t clear when you merged
- competition laws may block it

Question 8

what are the costs/benefits of vertical integration

Answer 8

benefits
- saves on costs - evenryone adds a markup to their service
- more control/independence over the process

costs
- not spreading out risk, so a decline in the industry will affect all parts of your company
- costly to achieve

Question 9

what are the costs/benefits of conglomerate integration

Answer 9

benefits:
- spreading your risk
- reducing competition
- maximising profits
- opportunity for cross subsidisation

costs
- more difficult to achieve economies of scale
- buying a company producing a product for which your firm doesn’t have any expertise

Question 10

what are the costs/benefits of internal growth

Answer 10

benefits:
- retain control of company
- economies of scale
- receive all benefits yourself
- less risky

costs:
- takes time