FIRMS

A firm is a business organization that produces goods and services with the aim of making profits.
OR; A production unit under united management and control that employs factors of production
to produce goods and services.
A plant is a production unit / a workplace e.g. factory, farm, office or branch. A firm can have a
number of plants.
An industry is a group of firms producing the same product e.g. the car industry consists of firms
like Toyota, Volvo, General Motors etc., beer industry, music industry, banking industry.
Classification of firms
1. By stage/ sector.
1. Primary Sector.
This is involved in the extraction of raw materials or natural resources.
Examples: Agriculture, mining, forestry.
2. Secondary Sector
This is involved in the processing of raw materials from the primary sector into finished
products. Examples: Construction, clothing and steel industries.
3. Tertiary Sector
This is the sector involved in the provision of services e.g. banking, insurance, tourism,
transport, etc. The quaternary sector is a sub section of the tertiary sector that covers
service industries that are knowledge based e.g. information technology.
Note:
The changing importance of economic sectors
As a country develops, the dominance of the 3 sectors varies. In under developed
countries, the primary sector is most important, with further growth, the secondary
sector becomes more dominant and in developed countries, the tertiary sector is the
most important.
The importance of a sector is determined by its contribution to national output and the
percentage of the labourforce that it employs.
2. By private or public sector.
Private sector firms are those that are primarily owned by private individuals with the aim
of making profits e.g. sole traders and partnerships.
Public sector firms are those owned by the government on behalf of its people.
3. By the size of the firms.
 Firms are either small, medium or large. There are three main measures of the size of a
firm viz:
Number of workers employed: Small firms employ few workers while large firms employ
above 200 workers.
The value of output/sales: Small firms produce low output while large firms produce high
volume output.
The percentage share of the market controlled: Large scale firms dominate the market
up to 25% of market share.
Value of capital employed (value of assets): large firms employ more advanced capital
equipment.
Factors that influence the size of a particular firm
 The age of the firm: Most firms start small and overtime grow in size.
 Availability of financial capital: The more financial capital a firm has to draw on
for its expansion, the more its capability for growth
 The type of business organisation: Multinational companies (MNCs) are larger
than shops owned by one person, they use retained profits, borrow and sell shares
to raise finance to expand.
 The size of the market: When there is large demand for the product, it is possible
for the firm to grow to a large size.
 Internal economies and diseconomies of scale: When a firm is experiencing lower
average costs as it expands, it can lower the price of its products and capture more
market share.

Small Firms.
A small firm is one that employs less than 50 workers with small output and
controlling only a small share of the market e.g. less than 5%.
Reasons for the continued existence of small firms.
 Some are still in infancy
 It may be the preference of the owner to remain small e.g. may want to avoid the stress
of running a large firm.
 Existence of small market which does not favour large firms e.g. very expensive items such
luxury yachts, customized designer dresses and suits.
 Limited funds to finance expansion
 It may be receiving support from the government
 It may be providing personal services to customers e.g. hair dressing
 Flexibility: Small firms are able to survive because they adjust to changes in market
conditions quickly.
 Ease of entry into an industry: The lower the barriers to entry e.g. less capital required,
the larger the number of small firms likely to be in an industry.
 Advantages and Disadvantages of Small firms
Advantages Disadvantages

Employ small number of people Limited production capacity

Provide raw materials and components to Do not enjoy economies of scale since
large firms they are small scale

Extend goods and services nearer to
people e.g. retail shops/groceries operate
near residences
They are flexible and supply what
customers want
Lack of capital to finance their expansion
Limited technology due to low level of
research and development

Provide enterprise and dynamism in the Less well known due to limited marketing
economy (develop the skills of
entrepreneurs)
Give people an opportunity to work for
themselves i.e. self-employment
Challenges faced by small scale firms
 Inadequate capital to finance expansion
 Unskilled labour which limits production
 Low levels of production
 Inability to enjoy economies of scale.

GROWTH OF FIRMS:
1. Internal Growth (Natural / Organic growth)
This comes about as a result of internal expansion e.g. through diversifying into other
products, opening new plants, increasing market for its current products.
2. External growth
This happens when two or more firms join together to form one. This can be through;
a) A merger – This is where two or more firms join together to form one enterprise.
b) A Takeover – This occurs when one firm buys 51% or more shares of another
company that gives it controlling rights over the business.
c) Acquisition – This occurs when one firm gains control of part of another
business.

Reasons why Firms May Wish to Grow in Size

 To reduce costs by benefiting from economies of scale
 To increase their market share
 To develop new and improved products to increase profits
 To expand their markets to other countries
 To become stronger and secure
 To increase the profitability of the firm

Internal Growth
This can occur from;
1. Reinvesting or ploughing back some of the profits made by the firm
2. Requesting owners/shareholders to put more money or capital into the firm for
expansion
3. Franchising where a larger firm allows another firm to use its business idea\name in
return for a share of the profits made
4. Opening new stores/ retail outlets to allow an online trading platform to expand the
market
5. Outsourcing to enable the firm contract out some of its services to another firm.

External Growth
This occurs through;
1. A merger with another firm to form a single business
2. Take over i.e. gaining 51% and above shares of another firm
3. Acquisition of part of another business
Advantages and Disadvantages of Internal Growth

Advantages Disadvantages

It allows owners to keep control of the It is a slow process and takes a long time to
business be achieved

Advantages and Disadvantages of External Growth

Advantages Disadvantages

Allows more rapid growth Risky i.e. the firm may join another firm it
doesn’t know about necessarily
Firms gain skills and knowledge it may not
possess

Firm is associated with existing well-known

brands
 Firms acquire new inventions and
technology

Firm is able to break into markets

MERGERS

Type Definition Advantages Disadvantages

Horizontal Merger Two or more Firms gain Diseconomies set in due to over expansion
firms at the economies of
Difficulty in merging the different
same scale
management structures of the integrating
level/stage of
Firms increase firms
production join
their market
together e.g.
share
two banks
Firms exchange
ideas /
technology
Rationalisation

Vertical Backward A firm merges -Cheaper costs of Managing the firm at different stages may
Merger (Merging with / takes raw materials be too difficult
towards a source of raw over another
-Retail outlets
materials) firm in the same
hence more
industry but at a
market
stage of
production
behind the
predator firm
e.g. tea factory
with tea
plantation

Vertical Forward Merger A firm merges Firm owns retail Management is hard at different levels
(Merging towards the with / takes outlet outlets to
market over another expand market
firm in the same
 industry but at a Helps in the
stage of development and
production marketing of new
ahead of the products
predator firm
e.g. car
manufacturer
and retail outlet

Conglomerate Merger A merger A firm diversifies It is difficult to coordinate operations of

between firms its operations unrelated firms
producing hence reducing
different risks
products /
There could be a
different
transfer of ideas
industries e.g. a
travel company
and an
insurance
company