There
are different ways to achieve this
growth.
Firms
may grow in two ways.
1)
Internal Growth and 2) External Growth
Internal Growth
Internal
growth is by increasing the size
by making more production of its products within the existing control and
management.
Initially
firms grow internally with in the management and control, which is known as internal growth. Here firms
increase its size by making more of its existing products or by increasing the
range of its products. Firms increase its size through various means, so
as to obtain the substantial net advantages.
One
such method is to change its pattern of operation of business, such as multi-national [A company that manufactures
a product outside its home country] or as a franchise
[The right to sell a well-established good or service produced by a large
business on payment of a royalty plus a percentage of profit].
Another
method is to change the pattern of organization, that is, sole trader to partnership,
partnership to private limited company, and private limited company
to public limited company.
When
firm needs more finance, or to get further specialization in management, sole
trader prefers to change as a partnership. In partnerships each partners
are liable and binding on the act done by any partner for and on behalf of
partnership. When partners knowingly or unknowingly do anything mistake, it is
binding on all the partners. More over the liability of each partner are
unlimited, so there is a chance of losing even their private property.
In
order to avoid such problems firms prefer to operate as a private limited company. Here
liabilities of shareholders are limited. Since private limited company cannot
issue its shares to general public, it is easy to keep control over the
management. But when the firm is in need of further capital to expand its
production they also will have to raise its capital by way of issuing shares to
general public. It is possible only by converting the firm into a public limited company.
External Growth
2)
The other is by increasing the range of
products. This can be achieved by either changing the method
of production, i.e., technical know-how or by joining together with
another firm, which is known as integration,
merger, and amalgamation or take over.
There
are different modes
of integration, merger, and
amalgamation or take over.
1)
A firm may join with one or more existing firms to form an entirely new firm or
retaining the identity of each amalgamating firms.
2)
A firm may join with one or more existing firms and the taken over firm loses
its identity completely.
3)
Holding companies - A firm is formed solely for the purpose of acquiring the
assets of a number of separate firms.
Although
there is no water tight classification
for integration, there are three different type of integration, they
are,
1)
Vertical integration – a) Vertical integration forward b) Vertical integration
backward
2)
Horizontal integration
3)
Conglomerate / Diversification.
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