Growth of Firms Firms can grow internally by

Growth of Firms

Firms can grow internally by: • By investing in more capital goods by borrowing more money, raising more funds from owners or by keeping some of the profit back in business.

Firms can grow externally by: • Through INTEGRATION-when one firm INTEGRATION combines with another business. • This can happen in any two ways: • By a merger-a friendly deal where two businesses join together (each business owns a share of the other business for mutual benefit or, • By a takeover-a forced and sometimes hostile deal where one firm buys a share of the other business.

Integration can take place in two directions • HORIZONTAL integration. This occurs when firms in the same industry and at the same stage of the production process combine to form a larger business. • For example: a merger between two banks - Westpac and Trustbank =Westpac. Trust

Advantages • It reduces competition, thus increases market share • Increase in market power • It has greater control on prices to make more profit • Gain new ideas from the other business • As its scale of operations is greater, it may experience economies of scale (decrease in average costs=efficient use of resources=more profit • The new business may not need all of the workers. They could remove some workers to become efficient and make more profit

Disadvantages For Firms • The businesses may have different objectives and targets • It costs a lot of money to merge with or takeover another business • Communication problems For Consumers • They may have to pay higher prices due to lack of competition • Less choice

VERTICAL integration • This occurs when a firm expands by combining with an existing business in the same industry but at a different stage of the production process. • This can be Backward or Forward

1 st Type • Forward Vertical Integration - where a firm buys into another in a later stage of production. • For example, a group of farmers buys the local milk processing plant.

2 nd Type • Backward Vertical Integration - where a firm buys into another firm in an earlier stage of production. For example, when KFC (takeaways) buys the country’s biggest poultry processing plant.

Why vertical integration? • Forward integration involves integrating with customer firms to ensure retail outlets for products. Frank Allen Tyres Dunlop • Backward integration involves integrating with a “input” supplier to reduce supply costs (or guarantee their quality). Rubber plantation

Advantages of vertical integration: • It has the advantage of cutting costs by reducing the profits, or reducing costs made at different stages of production. • It also controls the quality and delivery of materials right through the production process. • • Increase entry barriers to potential competitors • Increased control of the market. • Better able to deal with any periods of shortage.

Disadvantages of vertical integration • Increase in costs e. g. May need to appoint staff to run the business • Inexperience in the field could prove costly • Possible diseconomies of scale that may arise in terms of administration • Decreased ability to increase product variety

Diversification n Firms can also expand by diversification. This involves take over or merger with another firm in an unrelated industry. When a firm increases the range of businesses it is involved in, it may develop into an industrial combine, or conglomerate. For example: Mitsubishi

Why Diversify? Advantages n Firms diversify for a number of reasons: n to spread their risks. When sales in one industry are depressed, other industries provide more buoyant sales n to obtain other revenue sources, (so that it is not dependent on one market). n To increase the range of products they make or sell. n To develop into a conglomerate. n Take advantage of existing expertise, knowledge and resources in a company.

Example • A market gardener whose property is next to a Mc. Donalds car park. The market gardener turns part of his property into a mini-golf course to make additional income from the crowds who stop for takeaways.

Disadvantages • May result in the slowing growth of its core business. • Adding management costs. • Losses may incurred during the market consolidation process. • Complex dealings with the legal requirements of different countries.