3.1.2 Business Growth

• Business growth can be organic or external
  
  
• Organic growth (internal) is usually generated by
  • gaining greater market share
  • product diversification
  • opening a new store
  • international expansion
  • Investing in new technology/production machinery
    
    
• Inorganic growth (external) usually takes place in one of three ways
  • Vertical integration (forward or backwards)
  • Horizontal integration
  • Conglomerate integration
    
    

A diagram that illustrates how a firm can grow through forward or backward vertical integration

• Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain
  • E.g. A dairy farmer merges with an ice-cream manufacturer
• Backward vertical integration involves a merger/takeover with a firm further backward in the supply chain
  • E.g. An ice-cream retailer takes over an ice-cream manufacturer
    
    

• Firms will often grow organically up to a point where they are in a position to integrate with others
  
  

An Explanation of the Advantages & Disadvantages of Each Type of Growth

Type of Growth	Advantages	Disadvantages
Organic	The pace of growth is manageable Less risky as growth is financed by profits and there is expertise in the industry Avoids diseconomies of scale The management know & understand every part of the business	The pace of growth can be slow and frustrating Not necessarily able to benefit from economies of scale Access to finance may be limited
Vertical Integration	Reduces the cost of production as middle man profits are eliminated Lower costs make the firm more competitive Greater control over the supply chain reduces risk as access to raw materials is more certain Quality of raw materials can be controlled Forward integration adds additional profit as the profits from the next stage of production are assimilated Forward integration can increase brand visibility	Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles There can be a culture clash between the two firms that have merged Possibly little expertise in running the new firm results in inefficiencies The price paid for the new firm may take a long time to recoup
Horizontal Integration	Rapid increase of market share Reductions in the cost per unit due to economies of scale Reduces competition Existing knowledge of the industry means the merger is more likely to be successful Firm may gain new knowledge or expertise	Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles There can be a culture clash between the two firms that have merged
Conglomerate Integration	Reduces overall risk of business failure Increased size and connections in new industries opens up new opportunities for growth Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate	Possible lack of expertise in new products/industries Diseconomies of scale can quickly develop Usually results in job losses Worker dissatisfaction due to unhappiness at the takeover can reduce productivity

• There are several factors that constrain (hold back) firms from growing

1. The size of the market: the more niche the market the smaller the number of potential customers. Even large firms face this constraint as they move closer to capturing the domestic market - to increase market size they will have to expand internationally
2. Access to finance: small firms find it harder to access loans as they are considered to be more risky than larger firms. Due to the perceived risk, interest rates for any loans acquired tend to be higher
3. Owner objectives: Many owners desire to grow a business to a point that provides a certain lifestyle or standard of living - and not beyond. 
4. Regulation: Large firms are often constrained by competition regulation that aims to limit monopoly power. Firms that sell demerit goods also find growth can be limited by government policies such as age restrictions, minimum prices & indirect taxes