Grade 8A
Discuss whether a firm will always benefit from an increase in its size.
Time Duration for submitting the Article is:
November 4th to November 11th, 2013
Write here your answer in 500 Words.
Write here your answer in 500 Words.
Firm means the members of a business organization that owns or operates one or more establishment and by measuring their profit, growth ability, and market share we can measure a size of a firm. Firm also have different objectives like business expansion by increasing their profit and market control welfare by increasing their sales. Firm also can increase their profit by reducing cost of production, increasing productivity, minimizing wastes and the most important is increase their selling price and increase their production or total output reducing cost of production including decreasing wages of worker, increase economic of scale or large scale production reduces the average cost, and reducing the prices of raw material needed for production.
ReplyDeleteThe advantage of a big firm are that they can control their selling price most people use that brand the firm can increase their price how high they wanted and increase their profit also being a well known brand also good because many people will buy your product instead of other product because they are less well known product. They have economic of scale because of their high output and capacity give them cost advantages compare to other companies. They also have greater human resources or greater number of employee accomplish the work . Larger companies also have easier market entry as they have bigger capital than the small companies.
The disadvantage of a big firm that they are difficult to control and maintaining to make profit also in a big firm there’s some people who are lazy and dishonest which make business hard to develop. It also have difficullity to adapt quickly compared to small business, usually when something is discovered it’s a little bit to late to catch the error or another company has beat them in the market. They also have to pay tax to government and if the working condition is bad for the worker they can do a strike.
But there’s also some benefit if we make a small business. Like it’s easy to setup if we are a sole trader and there’s working flexibility because you aren’t controlled by your boss and you can do your own ideas. And being a sole trader we can take all the profit we make.
The disadvantage of a small business is that they have limited capital and it require skills to start
the business. And when they have unlimited liability or the bank will take their personal assets if they can’t pay their debt and that’s why they must be very responsible in every decisions they make. Lack of ideas also can be a problem if we want to start our own business.
Generally, most firms have the same main objective: profitability. Other objectives include growth in size, increase in market share, and increase in total sales or scale of production. Generally when firms have enough money, they will expand, both to increase market share, and to make more profits. There are two main ways a firm can grow in size and expand its scale of production, internal growth and external growth. Internal growth involves a firm expanding its scale of production through the purchase of additional equipment, increasing the size of its premises, and hiring more labour if needed. External growth can happen in two main ways, takeover and merge. Takeover is when a firm sold more than 50% of their shares to one firm which means that other firm will have control in the company. Merger is when 2 companies agree to join or merge to become a bigger firm.
ReplyDeleteInternal economies of scale will reduce the average cost of producing each unit of output as the scale of production is expanded in a firm. When a firm successfully grew internally they can enjoy several benefits. Large firms are often able to buy the materials and other resources in bulk, so generally suppliers can give discounts as it is cheaper for them to deliver one big purchase rather than many small deliveries. Large firms can buy or hire their own vehicles to deliver goods, rather than depending on other delivery services. In this way firms won’t have to pay the profit margin of the delivery company, like JNE and UPS. Large firms can often borrow more money from the bank with lower interest rates than smaller firms which have high interest. This is because banks can trust large firms on paying back because they have more financial security and more assets, such as premises, for the bank to use as collateral against loans, while smaller firms are not as easily trusted because there are risks of the firm getting bankrupt or not being able to pay the loan back with interest. Large firms also can sell shares to raise permanent capital which doesn’t have to be paid. Large firms often have more financial resources available to invest in cutting edge technology for machinery and equipment, to train and recruit highly skilled workers, and to research and develop new products to increase the efficiency in production, while smaller firms may not be able to do so because of insufficient funds. A large firm may have more customers in different countries which can reduce the risks of losing a major customer or a failure in the sales of a product, because most large firms do diversification. Diversification is to produce a variety of products while expanding into different markets, for example, Samsung mainly built televisions, but now they are producing, hand phones, smartphones, washing machines, and other home appliances.
Ivan alexanderSaturday, 19 October, 2013
ReplyDeleteBut although there are many benefits of firms expanding, there are disadvantages when the firms grow too much, firms can expand into very large companies, but they will face consequences. Growing too large can produce problems because of diseconomies of scale. Diseconomies of scales are the force that causes larger firms and governments to produce goods and services at increased per-unit costs, which is the opposite of economies of scale. Managing a large firm can be difficult, especially if the firm has factories spread across many regions, while producing a very wide range of products, and with many different layers of management. This can cause inefficiency in making decisions and can take a longer time for it to be acted on by employees. Some very large firms require a variety of materials, components, and use a lot of power consumption, which can cause shortages and may hold up production. Some very large firms have difficulties in attracting enough workers with the right skills, so they may have to spend more money in training and increasing wages to avoid the employees from working for other companies. Very large firms generally use highly automated machines and equipment for production so the workers working on the machine can become bored, demotivated, or even uncooperative, which can cause strikes if the worker thinks he/she is being treated badly. Large firms also may outgrow their market or find their product too standardized, which can cause difficulties in constantly attracting new customers. Some owners of large firms need to increase capital by selling parts of their ownership, and powerful shareholders can disagree with the owner, which can potentially lead to disputes and may harm the company. Agglomeration diseconomies may occur if a firm merges with too many firms which produce many different products at many different stages of production. The business owners and managers may find it difficult to coordinate all the different activities of the merged firms.
To summarize what we have discussed, firms can benefit by economies of scale from growing either internally or externally, but too much growth can lead to many diseconomies of scale like management diseconomies, labour diseconomies, and agglomeration diseconomies. So it is best for a firm to grow but just up to the right limit, while avoiding accidentally growing too much and cause many problems.
Ivan Alexander
8A