Growth and survival of firms
How firms grow
- internal (organic) growth — growing bigger by selling more.
- external growth — joining another firm via a merger or takeover:
- horizontal — same stage, same industry,
- vertical — a different stage (a car maker buys a tyre maker),
- conglomerate — a different industry (spreads risk).
Practice
A car maker buying a tyre maker is an example of:
Joining a firm at a different stage of the same industry is vertical integration.
Why some firms stay small
- a small market (local services), the owner wants control, or few economies of scale.
- They survive with personal service or a niche.
- Barriers to exit (costly machines that can't be sold) can trap a firm in a loss-making market.
Practice
A reason some firms stay small is:
Small markets, a desire for control, or few economies of scale keep firms small; niches help them survive.
Practice
High barriers to exit can trap a firm in a loss-making market.
Costly assets that cannot be sold make leaving expensive, trapping the firm.
You've got it
Key idea
- internal growth (sell more) vs external (merger/takeover): horizontal/vertical/conglomerate
- small firms survive via niche markets and personal service
- barriers to exit can trap a firm in a loss-making market