Why do firms grow? Unit 2.2

Why do firms grow? To make more profit for owners Gain economies of scale Increase control of market Spread risk

To make more profit for owners

Gain economies of scale

Increase control of market

Spread risk

Methods of Growth Internal Growth External Growth Merger, amalgamation or takeover

Internal Growth

External Growth

Merger, amalgamation or takeover

Methods of Growth Defined Internal Growth means a firm increases its own output without joining with another firm A merger or amalgamation means 2 or more firms coming together by agreement under common ownership A takeover is when one firm buys over another. This is not always welcome.

Internal Growth means a firm increases its own output without joining with another firm

A merger or amalgamation means 2 or more firms coming together by agreement under common ownership

A takeover is when one firm buys over another. This is not always welcome.

Growing Internally Producing more Increase the market (more customers) Increase sales

Producing more

Increase the market (more customers)

Increase sales

Integration There are three types of integration: Horizontal Vertical Conglomerate

There are three types of integration:

Horizontal

Vertical

Conglomerate

Horizontal Integration This is when firms join who are at the same stage of production I.e. Reebok Nike +

This is when firms join who are at the same stage of production

I.e.

Vertical Integration This is when firms at different stages of production merge + + Forward Integration Backward Integration

This is when firms at different stages of production merge

Conglomerate Integration When firms spread the risk of their businesses by not relying on one product or market. This is called diversification. Examples of conglomerate mergers are: Imperial Tobacco Company who also own Golden Wonder crisps. The two don’t seem related. That’s the point.

When firms spread the risk of their businesses by not relying on one product or market. This is called diversification.

Examples of conglomerate mergers are: Imperial Tobacco Company who also own Golden Wonder crisps. The two don’t seem related. That’s the point.

Motives behind mergers & takeovers Market control Control of raw materials Internal economies of scale Market power Rationalisation Diversification

Market control

Control of raw materials

Internal economies of scale

Market power

Rationalisation

Diversification

Innovation & Competition Companies have to keep up-to-date and be ahead of the market and competitors. This means developing new ideas and products. Billions of pounds are spent each year by firms R&D departments trying to come up with new inventions. Can you think of a new invention of the last couple of years?

Companies have to keep up-to-date and be ahead of the market and competitors.

This means developing new ideas and products.

Billions of pounds are spent each year by firms R&D departments trying to come up with new inventions.

Can you think of a new invention of the last couple of years?

Benefits of Growth The main benefit of growing is to be able to produce output at a lower cost per unit. As you make and sell more, you buy in bulk and production processes become standardised. The more you produce the less it costs for each individual item. Look at the example on the next slide:

The main benefit of growing is to be able to produce output at a lower cost per unit.

As you make and sell more, you buy in bulk and production processes become standardised. The more you produce the less it costs for each individual item.

Look at the example on the next slide:

This is called economies of scale £25 £30 Cost per table (average cost) £250,000 £150,000 Total cost of production per month 10,000 5,000 No. of tables made each month Extended Factory Original Factory

Economies of Scale Internal Technical economies Financial economies Managerial economies Marketing economies Buying economies Risk economies External Specialist training Transport facilities Support services Labour Reputation Co-operation

Internal

Technical economies

Financial economies

Managerial economies

Marketing economies

Buying economies

Risk economies

External

Specialist training

Transport facilities

Support services

Labour

Reputation

Co-operation

Diseconomies of Scale Internal Poor communication Loss of quality Loss of custom External Congestion Pollution Environmental damage Wasteful competition

Internal

Poor communication

Loss of quality

Loss of custom

External

Congestion

Pollution

Environmental damage

Wasteful competition

What is a Large Firm? We can measure the size of a firm by: Sales (Turnover) Number of employees Value of Assets Level of Profits Value of Shares

We can measure the size of a firm by:

Sales (Turnover)

Number of employees

Value of Assets

Level of Profits

Value of Shares

Small Firms (SMEs) Firms have to start somewhere! Luxury products usually made by SMEs Personal services usually performed by SMEs SMEs can be suppliers for large firms Goods & services can be for a local market

Firms have to start somewhere!

Luxury products usually made by SMEs

Personal services usually performed by SMEs

SMEs can be suppliers for large firms

Goods & services can be for a local market

Benefits of SMEs Easier to manage Workers feel part of firm Flexibility Less union problems Community benefits too

Easier to manage

Workers feel part of firm

Flexibility

Less union problems

Community benefits too