Firms

Firms

1. How they grow?

   • Horizontal integration
     • Merger between two firms at the same stage of production
     • Lloyds TSB & HBOS (Jan 2009)
     • Orange & T-Mobile (Sept 2009)
     • ↑ Eos
     • ↑ Market share
   • Vertical integration
     • Firms at different stages of the productive process within an industry
     • ↑ Barriers to entry
     • ↑ Control over suppliers / markets
     • Ensure smooth production process
     • Forward
       • Next stage of the production process
     • Backward
       • Previous stage of the production process
   • Conglomerate integration
     • Merger between firms in entirely unrelated industries
     • ↑ Greater spread of risk
     • ↑ Range of output to ↓ reduce exposure to any one market
     • Use funds to cross-subsidise investment in new areas
       • Taking chance to innovate without losing its revenue drivers
     • (Branson) & Virgin
   • Organic growth
     • Reinvestment in firm as it is and use of business strategies to expand itself
   • Takeover
     • Kraft over Cadburys

2. Why grow?

   • ↑ M/S
     • Aim to become dominant firm in the market
     • ↑ Profits
       • ↑ Sales
         • ↑ Brand recognition
         • ↑ Outlets
       • ↓ Cost of production
         • ↑ EoS
           • Able to use size to drive down LRAC to a lower point. This approaches or reaches the minimum LRAC point and therefore moves them closer to / reach productive efficiency
     • ↑ Power to set price
   • ↑ Power
     • ↓ Risk of takeovers by predatory firms in the industry
     • Help them survive major economic downturns
       • E.g. in 2009 a number of firms merged to ensure long term survival despite falling sales
   • Satisfy managerial ambitions
     • To run a successful business
     • ↑ Share prices if they receive shares as part of their renumeration
     • Leave a legacy
   • Make the most of an opportunity
     • Profit is subject to corporation tax and so want to spend revenue before it is classed as profit
   • Gain expertise quickly rather than through slow establishment

3. Why remain small?

   • Barriers to entry
     • Legal
       • Govt. legislating to prevent entry or growth of a firm
         • Allow monopolies such as National Lottery & formerly nationalised utility companies
       • Patents
         • Especially pharmaceutical and hi-tech industries as a lot is spent on R+D
       • Licenses
         • Accounting firms be approved by their respective trade bodies before being able to operate
     • Marketing
       • Imposed by established firms
       • Branding / Ad campaign
       • Cost of a failed advertising campaign can't be recouped and are therefore sunk costs
         • E.g. Coca-Cola lost millions trying to bring 'Dasani' in to the UK market
           • Most companies can't afford to take such a risk
     • Pricing
       • Predatory
       • Limit
     • Technical
       • Existing technical expertise and EoS
   • Niche-Market
     • Little scope for growth
     • Expansion may lose local customers who are loyal because of the personal service
   • Lack of resources
     • Expertise
     • Funds
     • ↑ Bureaucracy with hiring ↑ staff
   • Minimum Efficient Scale
     • Already exploited EoS meaning expansion would lead to Dos
   • Lack of motivation
     • Unwilling to take unecessary risks
     • Satisficing
       • Where a firm makes just enough profit in business and then allows other objectives to take presidence
   • Avoid attention from potential buyers
     • Avoid attention from firms that may want to take over
   • Monetary benefits
     • Tax thresholds
     • Grants

4. Why do some firms break up?

   • DoS
   • Managers lose control of day to day running