Why Firms Grow

Front 1

Why firms grow...

Back 1

Growth can increase profit and bring other benefits

Front 2

Why do firms usually grow?

Back 2

So they can increase their profits

Front 3

There are several ways growth can achieve this. (3)

Back 3

1. Increasing economies of scale - to minimise LRAC

2. Increasing market share / reducing comp - some monopoly power able to set prices and make supernormal profits

3. Expanding to new markets - different countries

Front 4

Internal growth means increasing production scale

Back 4

Internal growth result of firms increasing factors of production...for example...

Building a larger factory or hiring more workers

-Have control over how growth occurs

-Tends to be slow

Front 5

External growth means combining firms

Back 5

Growth as a result of takeovers or mergers

• Takeover firm buys another firm
  
• Merger two firms unite

- Can be a cheaper growth and also quicker

- Gain expertise and experience

External growth can happen through: Horizontal, Vertical or Conglomerate integration

Front 6

Horizontal Integration

• What is it?
  
• Give a real life example
  
• What does it help firms do?

Back 6

Combining firms at the same stage (production/products

e.g. 2 pharmaceutical companies or book shops

Increase economies of scale, reduce competition and increase market share

Front 7

Vertical integration

• Define what it is..
• What is forward v integration?
• What is backward v integration?

Back 7

Combining at different stages of production process of the same product

When a firm is further forward in p process e.g. Leather manufacturer buys a shoe factory

Firm takes over another that is further back in production p: book printer buying paper plant

Front 8

Conglomerate integration

• What is conglomerate integration?
• What is an advantage of it?
• Profits can be used where?

Back 8

Combining firms in completely different markets, diversification

One part of firm does badly, can easily compensate for by profit from another area

Profits from one product can be invested into another

Front 9

What is a demerger?

Back 9

A demerger is the breaking up of a firm into separate firms

Front 10

When may a firm decide to demerger?

Back 10

When a firm is experiencing disadvantages as a result of expanding into different markets.

May sell off parts to create separate firms.

Front 11

What is the aim of a demerger?

Back 11

To allow each new smaller firm to focus on a specific market and to make more profit than they did as part of the larger firm.

Firms likely to sell of weak parts of the business making little/no profit.

Front 12

What can help firms grow?

Back 12

New technology - New products produced

Front 13

Synergy demand is?

Back 13

New products sustain or increase demand for existing products

Front 14

What can New products also do to markets?

Give an example

Back 14

New products can cause an existing market to decline or disappear...

Video rental shops blockbuster shut down, now people can access films online through smart tv's etc

Front 15

Why do businesses stay small?

Back 15

1. Forced to stay small if they cant raise necessary finance
   
2. Firm in a niche market, small demand no potential to expand sales
3. Legal requirements are simple and less exp
4. Could experience diseconomies of scale

Front 16

Concerns for a small business may be... Getting bigger might mean...

Back 16

1. Relationships with customers more impersonal

2. Complacent with operations, less efficient and less focused

3. Less responsive to change

4. Extra work and risks involved in expanding

5. To go un-noticed by larger firms