Discuss why do firms want to grow and means of growth

Horizontal integration occurs when firm (A) integrates with firm (B), were both firms are at the same stage of production, in the same industry.

Motives for vertical integration

* Security

When firms perform forward integration, firms safeguard their retail outlets for their products, therefore the firm establishes authority in how the products are sold and distributed. When backwards integration occurs, firms safeguard the production and quality of vital inputs

* Efficiency

Increased efficiency plays an important role in the integration of firms. Often the management of one firm sees another firm's management as incompetent, with the belief that they could increase the efficiency of the other firm. It is also highly likely that the advantages of the economies of scale may be gathered after integration. Furthermore if the particular stage of production can be preformed more efficiently or if the combined value of the two firms outweighs the individual value, an incentive for integration id put forward.

* Improved image

A major motivating force behind forward integration is the improvement of retail outlets, thus increasing sales and consumer satisfaction.

* Monopoly

Full control over retail outlets or raw materials need for other industry through integration proves very attractive to firms as they can now control the distribution of these services and materials, Thus a monopoly is created, but this does not occur as governments have regulations disallowing such practices.

Factors that stimulate horizontal integration

* Monopoly

Firms, which perform horizontal integration, are prone to be at the same stage of production; thus a possible motive for integration could be the achievement of a monopoly. For example if firm (A) integrates with a firm that provides raw material vital for a specific product, a monopolistic position is fabricated.

* Efficiency

A factor stimulation horizontal integration is the likelihood of increased efficiency. This occurs more in horizontal integration, as there is greater scope for the economies of scale to be reaped, notably in technical economies.

Even though there is an emphasis in the advantages of vertical and horizontal integration, one major reason for integration is diversification. Firms seek to create large conglomerate enterprises, through diversification, as this growth increases the economies of scale. More likely a reason, is security, as firms attempt to produce more than one product because production of a single good, is a high risk venture, because if demand falls, the firm would be forced to shut down.

Bibliography

Anderson, A.G

Economics -A new approach

Second Edition, 1992

Collins Educational

Harrison, Barry

Economics,

First edition, 1996

Longman

Smith, Charles

Economics Reviewed.

Third Edition, 1985

Oxford Press

2

6