Discuss why do firms want to grow and means of growth

Extracts from this essay...

Introduction

"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.

Middle

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.

Conclusion

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.

The above preview is unformatted text

Found what you're looking for?

  • Start learning 29% faster today
  • Over 150,000 essays available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Over 180,000 student essays
  • Every subject and level covered
  • Thousands of essays marked by teachers
  • Over 180,000 essays
    written by students
  • Annotated by
    experienced teachers
  • Ideas and feedback to write
    your own great essays

Marked by a teacher

This essay has been marked by one of our great teachers. You can read the full teachers notes when you download the essay.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review on the essay page.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review under the essay preview on this page.