Unit 4.3 The Growth of Firms
It is useful to group firms together according to whether they are large enterprises
or small and medium-sized enterprises (SMEs).
The size of firms can be measured in different ways. They provide useful clues about
the reasons why some firms grow into very large organizations while others remain
small.
How can size be measured?
There are a number of ways to measure and compare the size of firms:
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SIZE OF WORKFORCE (number of employees). But some large firms are
__________________ intensive and employ relatively few workers.
CAPITAL EMPLOYED This is the amount of money invested in productive
assets (machinery, factories etc) that generate revenue. The more money a
firm can invest in productive assets, the more it can produce. But production
by some large firms is ______________ intensive.
TOTAL SALES/REVENUE- the value of revenue is good indicator as to how
big firms are and comparisons can be made between other firms in the same
market by measuring market share
MARKET SHARE Large firms may dominate sales in the markets they
supply. But not all markets are large. Firms serving small or niche markets
will tend to remain small.
TOTAL SHARE CAPITAL (Total Equity)- Many large firms are Public
Limited Companies and an easy way to measure their size is to look at the
total value of shares they have sold. But, some large firms still remain
_____________________________________________.
INTERNAL ORGANIZATION Larger firms are divided up into different
departments each specializing in a particular function, such as purchasing,
sales and marketing, finance and production. In smaller firms, the owners
and employees all tend to carry out all these functions.
Task: Use Wikipedia to find the different measurements of size for each of
these companies and rank them according to each measurement.
Company
Apple
Exxon
Mobil
Amazon
Saudi
Amarco
Walmart
Revenue Rank
Assets
Rank Total Rank Employees
(capital
Equity
employed)
Rank
How do firms grow?
Internal growth or organic growth is when a firm expands naturally through the
purchase of additional equipment and increasing the size of its premises
This will increase its fixed costs but will also increase output.
External growth is when two or more firms join together to form a larger
enterprise. This is known as integration. Integration involves the merger of two or
more firms or the takeover of one company by another.
1. Horizontal Integration: when one firm merges with another firm or takes
over another one in the same industry and at the same stage of production.
Example Costa and Starbucks.
2. Vertical Integration: one firm merges or take over another firm in the same
industry but at a different stage of production. Vertical Integration can be
either forward or backward:
 Backward Integration is when a business merges or takes over a business
which takes it near to the source of raw materials. For example an oil
refinery combined with another firm which is into oil drilling.
 Forward Integration is when a business merges or takes over a business
which takes it near to the customers. For example, an oil refinery is
combined with company which owns petrol stations.
Example of vertical integration The world’s 4th largest steelmaker POSCO is bidding to purchase the
world’s 3rd largest shipbuilding company Daewoo Shipping & Marine Engineering (DSME). While both
firms are Korean, they are also multinationals. POSCO believes it can add considerable value to DSME by
specifically tailoring its steel to the specifications of the ships being built. Steel is a very significant input in
ship building. As such, this can be seen as forward integration by POSCO into one of the activities where
its major products are used. POSCO is also putting efforts to buy iron-ore and coal mines in Australia. It
has significant share-ownings in seven such Aussie firms. Both iron-ore and coal are major inputs in
making steel, so this is backward integration. POSCO is looking at other mines in Africa, Siberia,
Indonesia and Eastern Europe, and says it is looking to own 30% of its input supplies in the future.
3. Conglomerate Integration: It is also known as lateral integration. Take over
or merger with another firm in a completely different industry. For example,
a shoe manufacturer buys a biscuit producing business.
TEST ON INTEGRATION
Section 1 – glossary terms
Chain of production The various stages of production through which a good goes before
reaching the consumer. The chain of production shows the links
between the primary, secondary and tertiary sector.
Conglomerate
An organisation that operates in several unconnected product or
market areas. This brings diversification and therefore risk-bearing
economies of scale.
Diversification
The practice of moving into a product or market area which is
different from the one in which a particular business is already
established. This can bring about risk bearing economies of scale.
Economies of scale
Those factors that, as a business grows and its output increases,
allows the average cost of the business to fall.
Horizontal merger
or integration
The joining of two or more companies that operate at the same
level in the chain of production and produce the same type of
product. An example of this type of merger would be McDonalds
and Burger King.
Lateral merger
The joining together of two firms at the same stage of production
which produce similar, but not identical, goods. They will also
have employees with similar skills and employ similar capital
goods. Examples are a biscuit and a chocolate manufacturer.
Market share
A measure of the proportion of the total sales of a market that a
particular product, brand or business holds. This is often used as a
measure of business success.
Merger
The joining together of two or more firms. This might be because
one business has taken over another or because two firms have
agreed to join. There are several types including horizontal,
vertical, lateral and conglomerate.
Takeover
A situation where one company takes control of the ownership of
another company by persuading the owners to sell their equity
(either a sole trader, partners of shareholders).
Vertical merger
The joining of two companies from different levels of production in
a merger to become one company. The oil industry is an example
of a vertically integrated industry, with oil companies owning
businesses at all three stages of production (oil wells, oil refineries
and petrol stations).
Section 2 – data response
The chocolate manufacturer “Rowntree Macintosh” has been approached by ‘Nestle’ (another
chocolate manufacturer) with an offer of a takeover.
a)
What type of integration is this?
[2]
b)
Explain one advantage for Nestle, which could be gained from this type of
integration.
[2]
c)
Name two other types of integration.
[2]
d)
Apart from integrating with another business, identify one other method by which
a business can grow.
[2]
e)
Name 2 internal stakeholders affected by this takeover.
[2]
Marks out of 10