Revise Growth and survival of firms for Cambridge 9708 (7.7)

Firms pursue growth for several strategic reasons, moving beyond simple survival. The primary motive is often profit maximisation, as a larger scale can lead to lower average costs through economies of scale. Growing firms can also gain significant market power, enabling them to influence prices and create barriers to entry for new competitors. Another key driver is risk diversification; by expanding product ranges or geographical markets, a firm can reduce its dependence on a single source of revenue. Furthermore, managers may pursue growth to meet their own objectives (the principal-agent problem), such as increasing their salary or prestige, which are often linked to the size of the firm (sales revenue maximisation) rather than just its profitability.

Internal, or organic, growth occurs when a firm expands its own operations without acquiring other businesses. This is typically financed through retained profits or borrowing. Common methods include increasing production capacity, launching new products, expanding into new geographical markets, or investing in marketing to increase market share. While often a slower process compared to external growth, it is generally considered less risky. The firm maintains its existing corporate culture and can manage the expansion at a sustainable pace, avoiding the potential for culture clashes or the high costs and complexities associated with integrating another company. It allows a firm to build on its own strengths and reputation.

External growth is achieved through integration, which can be categorised into three main types. Horizontal integration involves merging with a firm at the same stage of production in the same industry, such as two car manufacturers joining. The main goal is to increase market share and reduce competition. Vertical integration involves merging with a firm at a different stage of production. This can be backward (e.g., a car manufacturer buying a tyre supplier) to secure supplies, or forward (e.g., buying a car dealership) to control distribution channels. Finally, conglomerate integration is the merger of firms in completely unrelated industries, primarily for the purpose of risk diversification.

Contrary to the assumption that all firms must grow to survive, many small firms persist and thrive. One key reason is their ability to operate in niche markets, which are too small or specialised to attract the interest of large corporations. Small firms can also offer personalised services and flexibility that larger, more bureaucratic firms cannot match. Some owners may make a conscious choice not to grow, prioritising control and work-life balance over profit maximisation (profit satisficing). Furthermore, barriers to growth, such as limited access to finance or heavy regulation, can constrain a firm's ability to expand, effectively keeping it small. Government support for small businesses also contributes to their survival.

Internal (organic) growth — the firm expands using retained profits: new factories, products, or geographic markets. It is gradual and avoids integration problems but may be too slow in fast-moving markets.

External growth — mergers, takeovers, or joint ventures provide rapid access to new capacity, technology, or market share. Risks include culture clashes, overpaying, and competition authority blocks.

Motives: economies of scale, market power, diversification, managerial objectives, defence against takeover.

Drawbacks: diseconomies of scale, regulatory intervention (monopoly concerns), integration costs, loss of focus (conglomerate), cultural conflicts.

In downturns or competitive pressure, firms may:

• Retrenchment — cut costs, close unprofitable branches, lay off staff.
• Asset sales — sell non-core divisions to raise cash.
• Diversification — enter new markets to spread risk.
• Niche focus — specialise in a profitable segment.

Short-run survival requires TR ≥ TVC (cover variable costs). Long-run survival requires TR ≥ TC (cover all costs).