Growth of Firms

Saturday, February 25, 2017


What is a firm? 
A firm is a unit of management trading under a particular name. It is a decision making production unit. An industry is made up of all those firms producing the same commodity. 

Why do firms grow? 
Firms try to grow in size for several reasons: 
  1. To enjoy economies of scale: As the firm expands, it can reduce its average cost of production. 
  2. To obtain a larger market share: A larger firm can exercise more control over price and output in the market. Large firms can also enjoy monopoly power. 
  3. To achieve greater security: Firms can achieve greater security by extending the market for their products and producing a wide range of goods. (It is known as ‘Diversification’.) So that they can face the fluctuations in demand and seasonal variations. 
How do firms grow? 
Firms grow through diversification and integration. Diversification refers to the extension of the product range and its markets. 

What is integration? 
Integration refers to joining together of two or more firms. There are three types of integration. 

1. Vertical integration: 
It refers to joining together of two or more firms in different stages of production. 
  1. Vertical integration backwards occurs when a firm merges with its suppliers. For example; a tea factory takes over tea plantation. 
  2. Vertical integration forwards occurs when a firm merges with its market outlets. For example; a petrol company takes over a number of petrol stations (ie. Retailers) 
2. Horizontal integration: 
It refers to joining together of two or more firms producing similar goods. For example; integration of two or more motor car companies. 

3. Conglomerates (Lateral integration): 
It refers to joining together of two or more firms producing entirely different products. For example; a sugar manufacturer takes over a motor car company.
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