External growth

• External growth (inorganic growth) usually involves a merger or takeover. A merger occurs when two businesses join to form a new, larger business. A takeover occurs when an existing business expands by buying more than half the shares of another business
• • Conglomerate integration: when businesses in unrelated markets join through a takeover or merger to spread risk over a wider range of products and services
• Horizontal integration: when two competitors join through a merger or takeover to increase market share and competitiveness
• • Backward vertical integration: when a business takes control of a business earlier in the supply chain
• • Forward vertical integration: when a business takes control of another business that operates at a later stage in the supply chain
• Advantages of external growth include:

  • reduced competition
  • market share can be increased quickly
  • potential for economies of scale
• Disadvantages of external growth include:

  • it can be expensive to takeover or merge with another business
  • managers may lack the experience to deal with the other business
  • there may be culture clashes which lead to diseconomies of scale