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:
- To enjoy economies of scale: As the firm expands, it can reduce its average cost of production.
- 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.
- 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.
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.
- Vertical integration backwards occurs when a firm merges with its suppliers. For example; a tea factory takes over tea plantation.
- 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.
o
Reasons
integration such as
o
To
achieve economic of scale: by joining together the cost of the company or
integrated firm will be low leading to economies of scale
o
To
reduce average cost or manufacturing cost in production: expense of the firms
will reduce
o
To
capture more market for their goods: with integration more market is captured
o
To
provide stability and endurance to the customers: reaching customer will be
easy after integration hence can
o
To
show power with responsibility
How do we measure the size of
firms?
The size of the firm is measured on
the basis of the following criteria.
- The number of employees
- The value of the capital employed
- The value of the output
- The market share etc.
Reasons for the survival of small
firms
1. Size of the market
Small firms do well if the market
for the product is relatively small. The reasons that keep a market small in
size are:
- people’s preference of “something different” which cannot be produced under mass production,
- some services and products cannot be standardized so that it can easily be provided by small firm,
- people need individual attention for certain services like hair dressing provided by small firms,
- geographical factors limit the market. Small firms are successful in that case, and
- most of the expensive goods have a small market as their demand is less. Eg; sports cars, luxurious yachts etc. Again small firms succeed.
2. Specialist producers and
distributors
Dis-integration helps the small firm
to prosper under manufacturing industry. It has an assured market to provide
particular parts to the larger firms.
Eg. Seat belts and rubber tire for
the motor car industry.
3. Co-operation between small
firms
Co-operation between small firms
help them to survive and enjoy economies of scale as larger firms do. It is
made possible by joint purchase inputs, joint ownership of research
laboratories etc.
4. Technical factors
There are certain units of capital
equipment that are relatively small and can be used only by small firms. For
example; knitting and sewing machines used in a clothing industry.
5. Flexibility
Small firms can easily respond
consumer demands and can adapt to changing business conditions.
6. Government assistance
In most countries, governments
provide grants, subsidies and tax exemptions for the growth of small firms.
These factors lead to survival of small firms in the rapidly changing business
world.
7. Geographical Condition
It’s may not profitable for large
firms to supply in remote places hence small firms survive
8. Avoid Potential buyers
If the small firm is growing there
will be many buyers who want to take over. Hence to avoid potential buyers
small firms will remain small.
Why
do firms remain small?
What
are small firms?
According
to the 1971 Bolton Report, small firms are firms:
-
With
relatively small market share
-
With
owners who manage the firm in a personalised way, and
-
Who
aren’t part of any larger enterprise/don’t have a formalised management
structure.
Small
firms are usually sole traders, partnerships and private limited companies.
Barriers
to entry:
·
Legal barriers: can prevent firms from
growing/entering an industry, e.g. need to have a permit to operate, need to
have a licence from the government (such as with commercial radio stations).
·
Overt barriers: imposed by businesses
currently operational in the industry e.g. through branding and increasing
brand loyalty, lowering prices to just above average cost, lowering prices
below average cost (predatory pricing – firms can be fined for this.
·
Sunk costs: costs which firms will
not be able to recover on exit e.g. advertising and research & development.
Niche-market
businesses:
·
Specialist
or niche markets exist that large companies do not wish to supply.
·
These
markets don’t support expansion – there is little scope for growth.
·
e.g.
corner shops with their irregular opening hours, manufacturers of cricket bats
etc.
Lack
of expertise:
·
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.
expansion of an independent restaurant may require the miring of a manager and
the training of a chef – the loss of personal managerial control may lead to
increased costs and eventually losses.
Avoid
attention from potential buyers:
·
If
a firm grows too large then its increased profits may result in unwanted offers
from larger firms to take them over.
·
This
means that some firms prefer to remain small.
Lack
of motivation:
·
Some
sole traders aren’t willing to take on the opportunity cost in terms of lost
leisure from expansion.
Other
reasons:
·
Value
is placed on personal attention in some areas, e.g. management consultants.
·
Contracting
out – many small firms supply larger companies.
·
Co-operatives
– independent businesses may join together to gain the advantages of
bulk-buying while still retaining their independence (e.g. UK grocery chains
such as Spar).
·
Monopoly
power – large firms may allow smaller firms to exist to disguise restrictive
practices.
·
Family
businesses – wish to remain in control of their businesses, and don’t want to
take the risk of expansion.
Why
do firms grow?
·
Increase market share: become the dominant firm
in an industry
·
Increase sales: through larger brand
recognition and more sales outlets
·
Exploit economies of
scale: firm
is able to exploit their increased size and lower LRAC (long-run average cost)
– by driving down LRAC and approaching the minimum point on the LRAC curve, the
firm is moving closer to productive efficiency.
·
Risk-bearing economies: if product diversity is
increased it can mean that a firm is better able to withstand downturns in the
economic cycle or changes in the demand for specific products.
·
Benefit from greater
profits: a
firm aims to maximise profits and may be able to achieve this through
expansion.
·
Gain market power: so as to prevent
potential takeovers by larger predator firms and be better able to exploit the
market.
No comments:
Post a Comment