Growth And Survival of Firms (Copy)
7.7 Growth and Survival of Firms
7.7.1 Reasons for Different Sizes of Firms
- Economies of scale: Larger firms may operate at lower average costs.
- Access to finance: Bigger firms may have more borrowing power.
- Nature of product/market: Some industries favour small specialist firms (e.g., craft businesses).
- Technology: High-tech industries may require large scale to spread R&D costs.
- Regulation and legal limits: May restrict size (e.g., antitrust laws).
- Market demand: Niche markets may not support large-scale operations.
7.7.2 Internal Growth of Firms
- Organic Growth: Expansion using firm’s own resources.
- Methods: Increasing output, opening new branches, launching new products.
- Diversification: Expanding into new products or markets to reduce risk.
Advantages of Internal Growth:
- Maintains control.
- Gradual and manageable expansion.
- Less risky than mergers.
Disadvantages:
- Slower growth.
- May miss quick market opportunities.
7.7.3 External Growth of Firms – Integration (Mergers and Takeovers)
Methods of Integration:
- Horizontal: Firms at the same production stage merge (e.g., two car manufacturers).
- Vertical Forwards: Firm merges with customer/buyer stage (e.g., manufacturer buys retailer).
- Vertical Backwards: Firm merges with supplier stage (e.g., manufacturer buys raw material source).
- Conglomerate: Firms in unrelated industries merge.
Reasons for Integration:
- Achieve economies of scale.
- Increase market share.
- Reduce competition.
- Secure supplies or distribution channels.
- Diversify risk.
Consequences of Integration:
- Can increase efficiency and market power.
- May lead to monopoly concerns and regulatory action.
- Possible culture clashes between merging firms.
Table – Types of Integration:
| Type | Description | Example |
|---|---|---|
| Horizontal | Merge at same stage | Two airlines merging |
| Vertical Forwards | Merge with distributor | Brewery buys pub chain |
| Vertical Backwards | Merge with supplier | Coffee shop buys coffee farm |
| Conglomerate | Merge with unrelated firm | Tech company buys food chain |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course
7.7.4 Cartels
- Definition: Group of firms colluding to control prices, output or market share.
- Conditions for Effectiveness:
- Few firms in market.
- Similar costs and products.
- High entry barriers.
- Strong enforcement of agreement.
Consequences of Cartels:
- Higher prices, reduced output → allocative inefficiency.
- Increased profits for members.
- Risk of members cheating.
- Likely illegal in many countries.
7.7.5 Principal–Agent Problem
- Definition: Conflict between owners/shareholders (principals) and managers (agents) due to differing objectives.
- Causes:
- Shareholders aim for profit maximisation and long-term growth.
- Managers may prioritise sales growth, market share, or personal perks.
- Consequences:
- Decisions may not align with owners’ best interests.
- Risk of inefficiency and reduced profitability.
- Solutions:
- Performance-related pay.
- Share options for managers.
- Improved monitoring and corporate governance.