3.5.3 The Growth of Firms | CIE IGCSE Economics Revision Notes 2020

Internal & External Growth

The growth of firms can be organic (internal) or inorganic (external)
Organic growth is usually generated by
- Gaining greater market share
- Product diversification
- Opening a new store
- International expansion
- Investing in new technology/production machinery
Inorganic growth usually takes place when firms merge 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

Types of Mergers

Firms will often grow organically to the point where they are in a financial position to integrate with others
- Integration speeds up growth but also creates new challenges

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 & 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 & frustrating Not necessarily able to benefit from economies of scale Access to finance may be limited
Vertical Integration (Inorganic growth)	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 (Inorganic growth)	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 (Inorganic growth)	Reduces overall risk of business failure Increased size & 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

Exam Tip

Paper 1 MCQ frequently tests your ability to differentiate between forward vertical & backward vertical integration. This is all about a supply chain for a good/service. If a firm takes over another at an earlier stage in the supply chain - it is vertical backward integration.

The Growth of Firms (CIE IGCSE Economics)

Revision Note

Internal & External Growth

Types of Mergers

Exam Tip

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Author: Steve Vorster