Methods of expansion - external (inorganic) growth
Mergers and takeovers
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 Financial stakes in a company or business. of another business.
An example of a merger would be that business A and business B want to expand but do not feel they can get any bigger alone. Both businesses decide to come together and share their business locations, stock, marketing, products and staff. This allows them to grow together as a single business.
An example of a takeover would be where business A decides they want to grow but the area they want to grow into is already occupied by a similar or smaller business. Business A decides to buy over 50% of the shares in another business to take control, giving them access to grow by owning a new business in either the same or a different area of the market.
The four merger and takeover methods
There are four methods through which a business can merge with or take over another business.
Image caption, Horizontal integration occurs when two competitors join through a merger or takeover. The new business then becomes more competitive and increases its market share. This gives it more control when negotiating and setting prices.
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- Horizontal integration occurs when two competitors join through a merger or takeover. The new business then becomes more competitive and increases its market share. This gives it more control when negotiating and setting prices.
- Backward vertical integration occurs when a business takes control of a business earlier in the supply chain.
- Forward vertical integration occurs when a business takes control with another that operates at a later stage in the supply chain.
- Conglomerate integration occurs when businesses in unrelated markets join through a takeover or merger. This enables businesses to spread their risk over a wider range of products and services.
The advantages and disadvantages of external (inorganic) growth
Advantages of external growth include:
- reduced competition
- The percentage of a market taken by a particular business or product. can be increased quickly
- potential for Where the average costs (of production, distribution and sales) fall as the business increases the amount of product that it produces, distributes and sells.
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 A culture clash is a conflict that happens when people with different ideas or beliefs don’t agree on something. In business, this might come from different opinions on how a company should be run. which lead to When unit costs begin to rise as the business becomes too large.
