NOTNEEDEDWhy Firms Grow

Question 1

Growth can Increase Profit and bring Other Benefits

Answer 1

1. Firms usually grow to increase their profit - there are several ways that growth can achieve this:
   - Increasing economies of scale - a firm might grow to reach the minimum efficient scale of production (MES), where long run average costs are minimised
   - Increasing market share and reducing competition - if a firm controls a large part of the market they might gain some monopoly power that allows them to set prices and make supernormal profits
   - Expanding into new markets - a firm might try to sell its products in different countries, for example.
2. However, there are also other reasons why a firm might grow, such as to achieve managerial objectives - directors might seek the status of running a large firm, for example.

Question 2

Internal Growth means Increasing Production Scale

Answer 2

1. Internal growth (also known as organic growth) is growth as a result of a firm increasing in the levels of the factors of production it uses. E.g. increasing output by building a larger factory, hiring more workers, and increasing the amount of raw materials used.
2. A key advantage of internal growth is that a firm has control over exactly how this growth occurs
3. However, the downside is that internal growth tends to be slow, and it can also be expensive

Question 3

External Growth means Combining Firms

Answer 3

1. External growth (also known as inorganic growth) is growth as a result of takeovers and mergers:
   - a takeover is when one firm buys another firm, which becomes part of the first firm,
   - a merger is when two firms unite to form a new company
2. External growth is quicker and may be cheaper than internal growth. It might also be the easiest way to gain experience and expertise in a new area of business.
3. External growth can happen through horizontal integration, vertical integration, or conglomerate integration

Question 4

Horizontal and Vertical Integration happen between firms in the Same Market

Answer 4

Horizontal Integration:
1. Horizontal integration means combining firms that are at the same stage of the production process of similar products - e.g. a merger between two pharmaceutical companies or between a book shop and a music shop.
2. Firms can increase economies of scale, reduce competition and increase market share through horizontal integration
Vertical Integration:
1. Vertical integration means combining firms at different stages of the production process of the same product.
- Forward integration happens when a firm takes over another firm that is further forward in the production process e.g. a leather manufacturer buying a shoe factory
- Backward integration happens when a firm takes over another firm that is further back in the production process E.g. a book printer buying a paper plant
2. By taking over supplies or retailers, a firm can gain more control of the production process. This might be in order to maintain higher quality standards, or make the overall process more efficient
3. This can create barriers to entry by preventing competitiors from accessing suppliers or retailers

Question 5

Conglomerate Integration happens between firms in Unrelated Markets

Answer 5

1. Conglomerate Integration means combining firms which operate in completely different markets. e.g. an educational stationery supplier merging with a tractor manufacturer.
2. Conglomerate mergers allow firms to diversify, which means they can spread their risk - if one part of the new firm does badly, this can be compensated for by profit from another part of the firm
3. A Conglomerate merger will also allow a firm to use profits generated by one product to invest in another.

Question 6

Growth will have disadvantages

Answer 6

The growth of a firm can lead to some disadvantages, for example:

• If two firms merge there will be a duplication of staff, such as marketing, finance and human resources personnel. It’s likely that some of this staff will be made redundant. Furthermore, the two firms will each have a leader - these leaders will either have to find a way to work together, or one will need to leave.
• The merged firms may have different and incompatible objectives that will need to be resolved.
• A firm can put itself in a lot of debt in order to raise the finance necessary to complete a takeover
• The new, larger firm may suffer from diseconomies of scale
• A firm that takes over another business may overestimate its value and pay far more for it than it’s actually worth. This makes it hard for the new larger firm to make a return on the investment

Question 7

The growth of firms will Affect Consumers

Answer 7

ADVANTAGES:

• A larger firm may benefit from economies of scale whic could => price reductions for consumers
• The combined creativity of two firms working together may => the production of superior products

DISADVANTAGES:

• Consumers will have less choice if two, or more, firms merge.
• The reduction in competition caused by firms merging may also => higher prices for consumers.
• Two merged firms may produce less output than two separate firms, which will => price increases.
• Governments usually monitor mergers to see if they’ll => consumers getting an unfair deal. E.g. a merger can => the creation of a monopoly, which will have advantages and disadvantages for consumers. If a government decides that a merger isn’t fair to consumers, then it can take action to block the merger.