The Growth of Firms (Cambridge (CIE) O Level Economics): Revision Note

The pace of growth is manageable

Less risky as growth is financed by profits and there is expertise in the industry

Avoids diseconomies of scale

The management know and understand every part of the business

The pace of growth can be slow and frustrating

Not necessarily able to benefit from economies of scale

Access to finance may be limited

Reduces the cost of production as middle man profits are eliminated

Lower costs make the firm more competitive

Greater control over the supply chain reduces risk as access to raw materials is more certain

Quality of raw materials can be controlled

Forward integration adds additional profit as the profits from the next stage of production are assimilated

Forward integration can increase brand visibility

Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Possibly little expertise in running the new firm results in inefficiencies

The price paid for the new firm may take a long time to recoup

Rapid increase of market share

Reductions in the cost per unit due to economies of scale

Reduces competition

Existing knowledge of the industry means the merger is more likely to be successful

Firm may gain new knowledge or expertise

Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Reduces overall risk of business failure

Increased size and connections in new industries opens up new opportunities for growth

Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate

Possible lack of expertise in new products/industries

Diseconomies of scale can quickly develop

Usually results in job losses

Worker dissatisfaction due to unhappiness at the takeover can reduce productivity