Why does a firm grow?

Answer 1

Firms may undergo two different types of growth, for which there are three subdivisions of growth. Internal growth, the most common and recognised of the two methods, involves investment in new and/or better capacity (such as new buildings or technology) to improve productivity and growth. This is acquired and built from scratch. External growth entails merging with, taking over or acquisition of another private firm, again for the same reasons. From these stem vertical, horizontal and lateral growth. Vertical growth occurs when a firm grows backwards along its supply chain or forwards along its distribution chain. This concerns the production and sale of the good or service. Firms will grow via the former if they decide to create the components necessary to construct the final product - otherwise, they will have to buy them (through cheap imports, for example) and will not grow in this way. The latter involves the owning and usage of the outlets to sell the product. Each rely on one another - firms will not sell anything if they don't supply things to make their product; nor will they grow if they do not sell what they produce to generate profit for further investment. Increasingly, outsourcing of the initial supply process is being used as a cheaper alternative in competitive markets. Horizontal growth is when a firm acquires or builds more factories, plants etc. engaged in the same production processes in the same market. Acquisition in such a way helps to exploit economies of scale and possibly move firms into a more dominant, monopolistic role, if they happen to obtain enough of a share of the market. This can either be successful or not so in leading to an eventual rise in growth. Lateral growth occurs when a firm attains a place in a completely different market, in order to diversify and benefit from the potential economies of scale that result. These involve those of risk-bearing, financial and managerial. Firms may decide to remove themselves from declining markets and into those with great potential by this form of growth. Managerial diseconomies of scale can result due to an exposure to lacking expertise and skills in the industries they are investing in, so firms must have the necessary knowledge to ensure this does not happen. Firms wish to grow in size to maintain their position in the market, and to perhaps become leaders in their particular field. In competitive markets, growth.

Answer 2

• to reduce cost and achieve economies of scale
• to increase profits from larger markets
• to achieve greater security