Methods of growth
Owners of a business often want it to grow – to obviously increase market share, sales and subsequently profits.
Businesses can expand in two ways:
- Organic/Internally – by its own means. Expanding its existing operations through its own profits
- Inorganic/Externally – involving another business via a takeover or a merger or joint venture.
There are 3 types of mergers. They all involve 2 or more firms coming together to form the one business, though they have different impacts.
Horizontal Integration is when one firm merges with or takes over another one in the same industry at the same stage of production. E.g., a flour factory takes over a competing flour factory.
Vertical integration is when one firm merges with or takes over another one in the same industry but at a different stage of production. Can be:
- Forward – integrates with another firm at a later stage of production (i.e. closer to the consumer). E.g., a flour factory acquires a bakery or pizzeria restaurant.
- Backward – integrates with another firm at an earlier stage of production (i.e. closer to the raw material supplies). E.g., A flour factory takes over a wheat farm.
Conglomerate integration – is when one firm merges with or takes over another firm in a completely different industry. Also known as diversification. E.g., a flour factory takes over a jewellery shop!
All four methods of merging/integrating are very different even though they involve two businesses joining together.