growth

Question 1

why companies wish to grow

Answer 1

• Increase profit - Higher profit enables higher wages and more money for investment in expansion.
• Economies of scale - In industries with high fixed costs, increased market sales leads to lower average costs making a firm more competitive.
• Market dominance - With higher sales and market share, firms can have more influence over the long term in which they can raise price and profits.
• Risk bearing economies - A bigger firm has more resources to survive an economic downturn.

Question 2

Difficulties of Firms Growing 1

Answer 2

• Diseconomies of scale - Increasing size may lead to higher average costs due to difficulties of managing a large firm.
• Lost Perks - If a firm grows in size it may lose benefits of remaining a small firm (e.g. lower corporation tax and grants from government)
• Difficult for niche markets - Some firms may specialise in small niche markets - becoming a large firm reduces the attractiveness of the firm.
• Take over target - Listing on stock markets can make the firm vulnerable to takeovers / short termism.

Question 3

Difficulties of Firms Growing 2

Answer 3

• Profit satisficing - In bigger firms owners may struggle to retain control. Managers in charge may pursue other objectives, such as just doing enough to keep the owners happy.
• Legal barriers - A key patent may prevent other firms developing a strong brand name.
• Access to key locations - A new airline may struggle to grow because it has difficulty getting landing slots at Heathrow airport.

Question 4

How Firms Grow 1

Answer 4

• Internal expansion involves the firm increasing its sales and market share. This involves:

• Investing in new productive capacity / technology
• Marketing campaigns which increase demand for products
• Creating new product lines related to existing products.

Question 5

How Firms Grow 2

Answer 5

• External Expansion – involving a merger or takeover with another firm:
Horizontal merger, vertical merger - forward (acquiring a firm at next stage of production) or backward (previous stage), Conglomerate Merger.