slide_4-3a.pptx

IGCSE Economics The growth of firms But which is the largest? Measuring the size of firms There are a number of ways to measure and compare the size of firms: SIZE OF WORKFORCE But some large firms are capital intensive and employ relatively few workers. INTERNAL ORGANI...

IGCSE Economics The growth of firms But which is the largest? Measuring the size of firms There are a number of ways to measure and compare the size of firms: SIZE OF WORKFORCE But some large firms are capital intensive and employ relatively few workers. 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. CAPITAL EMPLOYED This is the amount of money invested in productive assets that generate revenue. The more capital a firm can invest in productive assets, the more it can produce. But production by some large firms is labour intensive. 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. How firms grow Internal growth or organic growth is when a firm expands its scale of production through the purchase of additional equipment and increasing the size of its premises 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 Just Eat and Hungry House "The Acquisition is consistent with Just Eat’s strategic ambition to accelerate its growth and increase its market presence in every geography in which it operates. Hungry House is an online food company operating solely in the UK, with a comparable business model to Just Eat. The Acquisition would generate significant benefits for Just Eat’s restaurant partners and customers. It would create an enlarged customer base for restaurant partners to access, while increasing the breadth of choice on offer to UK consumers through Just Eat’s platform. The combination of the two businesses would also generate compelling economic benefits of scale, with high operating leverage driving material synergies." 1. Travel booking site Expedia has snapped up rival Orbitz Worldwide in a $1.34bn cash deal: http://www.ft.com/ cms /s/0/95ba2778-b2d6-11e4-a058-... 2. BT has made a £12.5bn acquisition of EE, the UK's largest mobile group: http://www.bbc.co.uk/news/business-31144009 3. Under Armour is paying more tun $500M TO acquire two fitness tracking apps - MyFitnessPal and Endomondo: http://www.theguardian.com/technology/2015/ feb/05/... 4. Staples to buy Office Depot for $6.3bn" http://www.bbc.co.uk/news/business-31137020 5. AG Barr, the maker of Irn-Bru and Rubicon fizzy drinks, is spending £21m on Funkin, a company that makes natural fruit ingredients for cocktails: http://www.bbc.co.uk/news/ uk-scotland-scotland-bus... 6. Aviva's £5.6bn takeover of Friends Life creates UK's largest insurer: http://www.bbc.co.uk/news/business-30883907 7. O2 purchase by Three confirmed for £10.25bn as mobile operator consolidation continues: http://www.bbc.co.uk/news/business-30946005 8. Comcast & Time Warner Cable merged in a deal value of $69.8 billion: http://www.bbc.co.uk/news/business-26166729 Final Question: How have consumers been affected?  Growth through merger or takeover Horizontal integration occurs between firms engaged Vertical integration occurs between in the production of the same type of good or service firms at different stages of production Lateral integration occurs between firms in different industries in the same stage or different stages of production  The Private Firm as producer and employer Car dealer Forward Vertical Integration Conglomerate Integration Car maker Another car Yoghurt Horizontal maker Integration maker Backward Vertical Integration Tyre maker GCSE Economics@KES Slide 9 Why do firms want to grow?  What are economies of scale? They are cost savings from increasing the scale of production in a firm or industry Internal economies of scale Increasing the size of a firm provides an opportunity to change the way it is organized, run and financed to reduce the average or unit cost of production External economies of scale These are cost savings enjoyed by firms in large industries compared to firms in smaller industries  Internal economies of scale PURCHASING ECONOMIES e.g. discounts for bulk purchases MARKETING ECONOMIES e.g. mass advertising; own distribution network FINANCIAL ECONOMIES e.g. ability to borrow more at lower interest rates TECHNICAL ECONOMIES e.g. ability to afford and employ advanced equipment RISK-BEARING ECONOMIES e.g. offering a range of different products  External economies of scale These are cost savings enjoyed by firms in a large industry These may be: Access to a skilled workforce because firms can recruit workers trained by other firms in their industry Ancillary firms that develop and locate nearby large firms in other industries to provide them with the specialized equipment and business services they need Joint marketing benefits: for example, new firms locating near to others in the same industry may share their reputation for producing high-quality products Shared infrastructure: for example, the growth of an industry may persuade firms in other industries to invest in new infrastructure such as power stations, dock facilities and airports to meet increasing demand for these services  Can firms grow too large? Firms can experience problems if they expand scale too much and too quickly Falling productivity and rising average costs result from diseconomies of scale 1. A large firm may have to raise wages to attract sufficient numbers of workers 2. A large firm may suffer more industrial disputes because production lines are automated and work tasks are uninteresting 3. A large firm may suffer from internal communication and coordination problems, especially if it has many locations, many managers and many different activities  Why do some firms remain small? It may be because the market is a small, local or specialized niche market A small firm may be unable to raise enough capital to expand The owner may prefer keep the business small ▲ Smaller firms can often provide more personalized goods and services than many larger firms