Firms grow because
1) They are able to experience economies of scale, which allows them to
decrease costs of production and LRAC, so they are able to increase
their revenue and profits, making firms grow.
2) Firm has high market share of the market, so they can influence prices
and restrict ability of other firms to enter the market, so has a monopoly
and monopsony power, so can reduce cost, so can make more profit
overall, so firm can expand their business using retained profits.
3) A larger firm might diversify range of products. If demand falls in 1
product, then due to wide range of other products, they would be less
affected. Also, opening stores around the country and the world means
if a recession hits one place, the firm has other places which can back it
up, so less affected by recessions.
4) Firms may wish to grow to meet managerial objectives.
Firms remain small because:
1) Managerial objectives - Owners may not want business to grow as they
are satisfied with current profits and don’t want extra risk and work.
2) Regulations - Competition and markets Authority (CMA) may stop
monopolies taking over or merging, which stops them from growing.
3) Access to finance - Banks may be unwilling to lend money to firms due
to high risk so firms are unable to grow. Also, if firms don’t make as
much profit, they wouldn’t have money available to grow.
4) Diseconomies of scale
5) Firms already in the market may try to prevent new firms entering the
market using predatory and limit pricing. This makes it impossible for
new firms to compete due to extremely low prices in the market.
Principal agent problem = Separation of ownership and control = firms owned
by shareholders may have different motives to executives and managers of
the firm. This causes problems like:
- Shareholders want to maximise the returns of their investment so want
short-run profits maximised.
- Managers have other objectives like increasing sales over profits.
,Organic growth: Internal growth of a business by increasing their profits and
output. Eg: LEGO. They may open new stores and increase their range of
products.
+ Low risk
+ Management has a good knowledge of the business.
- Slow process
- Difficult for firms to get new ideas so can be less efficient.
Inorganic / Integration:
1) Horizontal integration = Firms in the same industry at the same stage of
production merge and integrate. Eg: Fiat and Peugeot
+ Can gain economies of scale
+ Reduces competition and increases market share (so firms have more
power to influence markets) so can raise prices which would increase
supernormal profits.
- Diseconomies of scale may occur if the firm becomes too big
- CMA may restrict these
2) Vertical integration = Integration of firms in same industry but at a different
stage of production process. Eg: Starbucks owns coffee bean farms. These
can include:
- Backward: A firm merges with a firm closer to the supplier in production
process. Eg: Tesco and food wholesalers.
+ Control over raw materials means supply and quality is
guaranteed, and more reliable.
+ Costs are reduced so more efficient and productive and
internationally competitive.
+ Disadvantages : No expertise so specialist knowledge can cause
diseconomies of scale.
- Forward: A firm merges with a firm closer to the market and closer to
customers. Eg: Coca Cola and Costa.
+ Increased potential for profit
+ More brand awareness.
- Lack of expertise and knowledge due to being in different
stages of production can lead to diseconomies of scale.
, 3) Conglomerate integration = Merger between firms in unrelated industries.
+ Increases brand awareness
+ Range of products reduces risk of collapse if 1 industry fails so more
likely to survive recessions.
- Lack of expertise and knowledge can lead to diseconomies of scale.
- Differences in nature of industry can cause conflict and low productivity.
Demerger: The separation of a larger firm into 2 or more smaller firms, either
to operate on its own or to be sold. Eg: Pepsi and KFC.
Reasons for a demerger may be:
- To avoid attention from the competition and markets authority
- Companies may be too large so can experience diseconomies of scale
of companies demerge to focus on individual markets to achieve
economies of scale and become more efficient and successful.
- To raise funds by selling shares of company. This money could be used
to invest in core business.
Impacts of a demerger:
- Businesses = Focus on smaller core businesses to become more
efficient. Can lead to innovation. However, it would have less influence
in the market so less monopoly power so less profit and loss of
economies of scale.
- Workers = Separate firms need new managers so more job
opportunities.
- Consumers = Cheaper prices and better quality products with more
choice. However, the way it operates changes with some branches
needing to close.
1) They are able to experience economies of scale, which allows them to
decrease costs of production and LRAC, so they are able to increase
their revenue and profits, making firms grow.
2) Firm has high market share of the market, so they can influence prices
and restrict ability of other firms to enter the market, so has a monopoly
and monopsony power, so can reduce cost, so can make more profit
overall, so firm can expand their business using retained profits.
3) A larger firm might diversify range of products. If demand falls in 1
product, then due to wide range of other products, they would be less
affected. Also, opening stores around the country and the world means
if a recession hits one place, the firm has other places which can back it
up, so less affected by recessions.
4) Firms may wish to grow to meet managerial objectives.
Firms remain small because:
1) Managerial objectives - Owners may not want business to grow as they
are satisfied with current profits and don’t want extra risk and work.
2) Regulations - Competition and markets Authority (CMA) may stop
monopolies taking over or merging, which stops them from growing.
3) Access to finance - Banks may be unwilling to lend money to firms due
to high risk so firms are unable to grow. Also, if firms don’t make as
much profit, they wouldn’t have money available to grow.
4) Diseconomies of scale
5) Firms already in the market may try to prevent new firms entering the
market using predatory and limit pricing. This makes it impossible for
new firms to compete due to extremely low prices in the market.
Principal agent problem = Separation of ownership and control = firms owned
by shareholders may have different motives to executives and managers of
the firm. This causes problems like:
- Shareholders want to maximise the returns of their investment so want
short-run profits maximised.
- Managers have other objectives like increasing sales over profits.
,Organic growth: Internal growth of a business by increasing their profits and
output. Eg: LEGO. They may open new stores and increase their range of
products.
+ Low risk
+ Management has a good knowledge of the business.
- Slow process
- Difficult for firms to get new ideas so can be less efficient.
Inorganic / Integration:
1) Horizontal integration = Firms in the same industry at the same stage of
production merge and integrate. Eg: Fiat and Peugeot
+ Can gain economies of scale
+ Reduces competition and increases market share (so firms have more
power to influence markets) so can raise prices which would increase
supernormal profits.
- Diseconomies of scale may occur if the firm becomes too big
- CMA may restrict these
2) Vertical integration = Integration of firms in same industry but at a different
stage of production process. Eg: Starbucks owns coffee bean farms. These
can include:
- Backward: A firm merges with a firm closer to the supplier in production
process. Eg: Tesco and food wholesalers.
+ Control over raw materials means supply and quality is
guaranteed, and more reliable.
+ Costs are reduced so more efficient and productive and
internationally competitive.
+ Disadvantages : No expertise so specialist knowledge can cause
diseconomies of scale.
- Forward: A firm merges with a firm closer to the market and closer to
customers. Eg: Coca Cola and Costa.
+ Increased potential for profit
+ More brand awareness.
- Lack of expertise and knowledge due to being in different
stages of production can lead to diseconomies of scale.
, 3) Conglomerate integration = Merger between firms in unrelated industries.
+ Increases brand awareness
+ Range of products reduces risk of collapse if 1 industry fails so more
likely to survive recessions.
- Lack of expertise and knowledge can lead to diseconomies of scale.
- Differences in nature of industry can cause conflict and low productivity.
Demerger: The separation of a larger firm into 2 or more smaller firms, either
to operate on its own or to be sold. Eg: Pepsi and KFC.
Reasons for a demerger may be:
- To avoid attention from the competition and markets authority
- Companies may be too large so can experience diseconomies of scale
of companies demerge to focus on individual markets to achieve
economies of scale and become more efficient and successful.
- To raise funds by selling shares of company. This money could be used
to invest in core business.
Impacts of a demerger:
- Businesses = Focus on smaller core businesses to become more
efficient. Can lead to innovation. However, it would have less influence
in the market so less monopoly power so less profit and loss of
economies of scale.
- Workers = Separate firms need new managers so more job
opportunities.
- Consumers = Cheaper prices and better quality products with more
choice. However, the way it operates changes with some branches
needing to close.
