1. GROWTH AND SURVIVAL OF FIRMS
- PART1
(A2 Economics)
1. Size of the firms
2. Growth of firms
3. How can firms grow?
2. Learning O bjectives
- explain the reasons for size of firms
- distinction between internal and external growth
such as integration, diversification, mergers,
acquisitions
3. Sizeofthefirms
There are many measures of the size of a firm. Some
of the measures are:
a) number of employees
b)value of sales = sales turnover or total annual
revenue
c) value of fixed capital employed,
d) market share out of total demand,
e) others e.g. tonnage for ships, acreage for farming.
4. Growth offirms
The firm may have different objectives for
expanding:
1) to achieve economies of scale
2)to obtain greater share of the market and hence
greater monopoly power
3)to reduce risks with a wider range of products
and services and markets
4) to increase profits
5. Howcan firms grow?
1)Internal growth - The firm increases its size by
producing more of its existing products or
extending its range of products.
2)External growth - The firm grows when it joins
forces with another firm or other firms to
form a larger firm. This means that the growth is
much faster than internal expansion.
6. Mergers
This occurs when two or more firms merge to form a
bigger organization. This
integration may be
i)Vertical integration takes place when firms in the same
industry but at different stages of production process join
together. There are two types of vertical merger:
- Forward integration
- Backward integration
7. Vertical Forward Integration
Forward integration: This involves the firm
buying/merging with firms which serve the customer.
Example: when a clothing manufacturing firm buys retail
outlets; beer producing companies in the U.K. buy pubs.
This is usually done to increase sale of their product.
8. Vertical Backward Integration
Backward integration: This occurs when the firm
buys/merges with its source of supply. Example: tyre
manufacturer in U.K. buys a rubber plantation
in Malaysia. This will ensure greater security and control
of raw materials.
Quality and quantity of raw materials can also be
controlled. The amount of raw materials being available
to competitors is also controlled.
10. Horizontal integration
ii) Horizontal integration takes place when firms in
the same industry, at the same stage in production
process integrate.
Example: POSBank and DBS. The bigger bank will
have a greater share of the market - market
dominance.
12. Lateral Integration
is the merger of two firms who sell related
goods or services but the firms do not compete
directly with each other.
Example: A book publisher might acquire a
magazine/newspaper publisher or even
television and other media products
13. Conglomerate Integration
Conglomerates take place when firms from
totally different industries merge.
These firms do not share similar products or
services.
Example: a shipyard buys up a firm producing
bread. The objective for this type of merger is
more for diversification to reduce risks.
15. Acquisitions
Acquisitions (takeovers) take place when a firm
buys up a smaller firm and absorbs it
completely. The smaller firm loses its identity
and will cease to exist. Another example of a
takeover exists when a company buys up 51 %
of a company's share and acquires 'controlling
interest'. The smaller company will still function
under its own identity. A 'holding company' is
usually established.
19. Q1
What is one of the long-term benefits to a firm of
vertical integration?
A a concentration on activities in which the firm has a
comparative advantage
B a reduction in the total costs involved in agreeing
contracts with other firms
C an increase in the firm’s market share
D improvements in efficiency resulting from
increased use of market incentives
20. Q 2
The takeover of a life assurance company by a bank is
an example of
A horizontal integration.
B lateral integration.
C vertical backwards integration.
D vertical forwards integration.
21. Q 3
An example of forward vertical integration for a
computer manufacturer would be a merger with
A another computer manufacturer.
B a computer retailer.
C a silicon chip manufacturer.
D a software developer.
