Internal growth of a firm refers to its expansion through activities carried out within the company rather than relying on mergers or acquisitions. There are two main types of internal growth - organic growth and diversification.

• Organic growth involves increasing the size of the business through the development of its existing products or services.
  • This can be achieved by increasing production, improving marketing strategies, expanding distribution networks, and opening new branches or stores.

     

• Diversification involves expanding the business by entering new markets or producing new products that are not related to the existing business.
  • Diversification can be either related or unrelated to the existing business.
    • Related diversification involves expanding into a market or producing products that are related to the existing business. For example, a car manufacturer diversifying into producing electric cars.
    • Unrelated diversification involves entering into a market or producing products that are not related to the existing business. For example, a car manufacturer diversifying into producing furniture.

       

• The choice between organic growth and diversification depends on the goals and circumstances of the business.
  • Organic growth is generally less risky and less expensive than diversification as it leverages existing strengths and resources.
  • Diversification can help to reduce risk by spreading the business across different markets or products and can provide opportunities for growth and innovation.

External growth of firms through integration refers to the process of two or more companies joining together to form a larger entity.

There are three main methods of integration:

• Horizontal integration: This occurs when two firms operating in the same industry and at the same level of production combine.
  • For example, if two car manufacturers merge to form a single entity, it would be a case of horizontal integration.

     

• Vertical integration: This occurs when two firms operating at different levels of production combine.
  • There are two types of vertical integration: backward and forward.
  • Backward integration occurs when a company acquires or merges with a supplier.
    • For example, a car manufacturer may merge with a company that supplies them with raw materials.
  • Forward integration occurs when a company merges with a distributor or retailer.
    • For example, a car manufacturer may merge with a dealership.

       

• Conglomerate integration: This occurs when two firms in unrelated industries combine.
  • For example, if a car manufacturer were to merge with a food production company, it would be a case of conglomerate integration.

The reasons for integration can vary, but some of the most common include

• achieving economies of scale,
• increasing market power,
• acquiring resources,
• and diversifying risk.

The consequences of integration can also vary

• increased efficiency and cost savings through economies of scale
• reduced competition, higher prices for consumers, and reduced innovation as a result of decreased competition and reduced incentives to innovate
• job losses, particularly if there is overlap in the operations of the two companies.

A cartel is an agreement among firms operating in the same industry to collude and coordinate their actions in order to restrict competition and increase their joint profits.

• Cartels are usually formed by companies that are oligopolistic in nature, meaning that they operate in a market with a small number of firms, giving them the ability to influence prices and market outcomes.

For a cartel to be effective, it requires a few conditions:

• There must be a small number of firms in the market, making it easier for them to coordinate their actions.
• The firms must have similar costs and production capacities, so that they can agree on production quotas and share the market.
• The firms must have a high degree of transparency and communication, so that they can monitor each other's actions and detect cheating.
• There must be barriers to entry that prevent new firms from entering the market and disrupting the cartel's agreement.

The consequences of a successful cartel can be significant.

• The cartel can increase profits for its members by raising prices above competitive levels and reducing output to keep prices high. This benefits the firms in the cartel, but can harm consumers who may have to pay higher prices for goods and services.
• Cartels can also discourage innovation and investment in the market, as the firms in the cartel may prefer to maintain their joint profits rather than invest in new products or technologies.

However, cartels are often difficult to maintain in the long run.

• Members may cheat on production quotas or price agreements in order to gain a larger share of the market, which can lead to the breakdown of the cartel.
• Additionally, governments may intervene to prevent the formation of cartels or to punish firms that participate in them, as cartels are often viewed as anticompetitive and harmful to consumers.

• The principal-agent problem arises from a conflict of interest between the owners (principals) and managers (agents) of a firm.
  • The owners want the firm to maximize profits, while the managers may have other objectives, such as maximizing their own salaries or job security.
  • This conflict of interest can result in the managers making decisions that are not in the best interests of the owners.

     

• One of the main reasons for this problem is that the owners may not have complete information about the actions of the managers. This information asymmetry can result in the managers making decisions that benefit themselves at the expense of the owners.
  • For example, a manager may choose to invest in a project that benefits their department, even though it may not be profitable for the firm as a whole.

     

• To mitigate the principal-agent problem, firms may use various mechanisms, such as performance-based compensation for managers or the appointment of independent directors to monitor managerial actions. However, it can be difficult to completely eliminate the principal-agent problem, as managers may still have some degree of discretion in decision-making and may prioritize their own interests over those of the owners.