3.1.2 Business growth

• Organic growth (AKA internal growth):


  Growing a business without a merger or takeover.

  E.g. selling in new markets, developing new products, etc.
• Non-organic growth (AKA external growth):


  Growth through a merger or a takeover.

  In a merger, the directors and shareholders of both firms agree that it is in their interest to join together.

  A takeover can be amicable or hostile.
• Horizontal integration (merger):


  A merger between two firms in the same industry at the same stage of production (e.g. two car manufacturers).
• Vertical integration (merger):


  A merger between two firms in the same industry at different stages of production.

  Forward vertical integration involves one firm integrating with another firm in a stage of production closer to the consumer (e.g. a car manufacturer merging with a car dealership).

  Backwards vertical integration involves a firm integrating with another firm in a stage of production further away from the consumer.
• Conglomerate merger:


  The merging of two firms in different industries with no common interest.
• Adv (+) and disadv (-) of organic growth

  (+) Less risky

  (+) Maintain brand image

  (+) Can be less expensive than inorganic growth

  (-) Slower growth

  (-) Lack of shared expertise
• Adv (+) and disadv (-) of horizontal integration

  (+) Economies of scale

  (+) Reduce competition

  (+) Growing in a market where the business is already successful makes horizontal mergers less risky than other types of mergers

  (-) Diseconomies of scale

  (-) Clash of cultures

  (-) CMA may block merger if it leads to too much monopoly power
• Adv (+) and disadv (-) of vertical integration

  (+) Greater control over suppliers of raw materials. Could reduce costs and increase quality (backwards)

  (+) Greater control over how the product is marketed/sold (forward)

  (-) Diseconomies of scale

  (-) Clash of cultures

  (-) Managers may not have expertise in the new part of the business
• Adv (+) and disadv (-) of conglomerate merger

  (+) Reduced risk by operating in different markets

  (+) Can use knowledge from different markets

  (-) Less likely to benefit from economies of scale compared to other forms of merger

  (-) Clash of cultures
• What are the constraints on business growth?

  -Size of the market

  -Access to finance

  -Owner objectives

  -Regulation