Why do firms grow or stay small? Unit 3

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  • Created on: 19-01-13 13:25
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Why do firms grow?
How is growth measured?
Sales turnover
Numbers employed
Market share
Stock market value (market capitalisation ­ value of shares)
Value of its assets
Not all the five measures above give the firm the same size ­ they vary between firms.
How do firms grow?
Internal growth:
This occurs through a firm expanding in its current market or finding new markets.
External growth:
Horizontal integration:
Integration between firms at the same stage of production or distribution.
Examples of these are:
Airline industry; Continental and United , BA and Iberia
Supermarket; Asda and Netto
Vertical integration:
These are mergers between firms at different stages of production or distribution.
Forward vertical integration is when a firm takes over a firm at the next stage of production. An
example of this is Apeejay Surrendra Group (who grow a lot of tea in their Indian plantations)
bought Typhoo Tea (who blend and package tea) for £80m in 2005.
If the firm taken over is at the previous stage of production then it is known as backward-vertical.
An example of forward and backward integration is with BP, who refine crude oil into petrol as well
as engaging in oil exploration and distribution of petrol at its filling stations ­ it is fully integrated.
This occurs when 2 firms merge that are in different unrelated industries- therefore they are
diversified. An example of a conglomerate is Unilever, which has, over the years, bought 900 brands
in food production, beauty products and household goods.
Why do some firms grow?
Firstly, they grow to increase market share so that they will be able to become the dominant firm in
an industry. This gain in market power will be beneficial since it enables them to prevent potential
takeovers by larger predator firms and enables them to exploit the market better.

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Secondly, they may want to grow to increase sales via larger brand recognition and more sale outlets.
Thirdly, a reason that firms may want to grow is to exploit economies of scale. This is because as a
firm grows it will be able to exploit their increased size by driving down the LRAC and approaching
the minimum point on the LRAC, thus coming closer to productive efficiency.…read more

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The owner of the firm may lack the knowledge or expertise to expand.
This may mean they lack access to the necessary funds to expand.
Low optimum efficiency:
The minimum efficient scale of production is low in many industries ­ no significant economies
of scale for such firms.
Once a firm has reached optimum efficiency any further increase could result in
inefficiencies and increased costs.
e.g.…read more



This 4 page set of notes explains the benefits to firms of growing and why some do not. Comprehensive and well written.

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