Discuss why do firms want to grow and means of growth
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"Discuss why do firms want to grow and means of growth" Mazin Abdel-Rahman The existence of internal economies of scale provides a major force encouraging firms to enlarge. There are different ways in which firms can grow, generally they can be described as internal and external growth. Internal growth occurs when firms use their own profits to finance an expansion of capacity. External growth occurs when firms integrate in the form of mutual agreement in the form of a merger or in the form of a takeover, where one firm acquires control of a minimum fifty-one percent of another firms equity. * Integration There are two types of integration, vertical and horizontal, vertical integration in further split into two types, backward and forward integration. ...read more.
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. ...read more.
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. ...read more.
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