Methods of growth

Organic growth

Organic growth is when a business grows naturally. This can be achieved through:

hiring more staff and equipment to increase its
opening new outlets
introducing new products

Advantages	Disadvantages
No loss of control as outsiders are not involved	Can be a slow method of growth
Hiring more staff will bring new ideas	May be limited by the size of the market
Investing in new equipment will increase production capacity	Restricted by the amount of finance available
Opening new branches means the company can reach new markets
Less risky than a takeover

Advantages	No loss of control as outsiders are not involved
Disadvantages	Can be a slow method of growth

Advantages	Hiring more staff will bring new ideas
Disadvantages	May be limited by the size of the market

Advantages	Investing in new equipment will increase production capacity
Disadvantages	Restricted by the amount of finance available

Advantages	Opening new branches means the company can reach new markets
Disadvantages

Advantages	Less risky than a takeover
Disadvantages

Horizontal integration

Horizontal integration is when two companies at the same stage of the production process merge or take over each other.

If Ford Motor Company merged with Toyota Motor Company that would be an example of

Advantages	Disadvantages
Removes a competitor from the market	Hostility and job losses may occur
Opportunity for greater economies of scale	Changes within the business could impact negatively on customer loyalty
Business gains a greater market	Can be expensive to purchase another company

Advantages	Removes a competitor from the market
Disadvantages	Hostility and job losses may occur

Advantages	Opportunity for greater economies of scale
Disadvantages	Changes within the business could impact negatively on customer loyalty

Advantages	Business gains a greater market
Disadvantages	Can be expensive to purchase another company

Vertical integration

Vertical integration occurs when firms at different stages of the production process merge together. There are two types called:

Forward vertical integration – when a business takes over a company at a later stage in the production process for example a customer such as a retail outlet for selling goods.

Advantages	Disadvantages
Guarantees an outlet to sell products	Entering into new markets may affect core activities as resources and expertise need to be shared
Cuts out the middle man leading to increased profits
More control over pricing and product display

Advantages	Guarantees an outlet to sell products
Disadvantages	Entering into new markets may affect core activities as resources and expertise need to be shared

Advantages	Cuts out the middle man leading to increased profits
Disadvantages

Advantages	More control over pricing and product display
Disadvantages

Backward vertical integration – when the business takes over a company at an earlier stage in the production process for example its supplier/source of goods and materials

Advantages	Disadvantages
Guarantees the quality of inputs and the supply of stock	Entering into new markets may affect core activities as resources and expertise need to be shared
Cuts out the middle man leading to increased profits
More limit supplies to competitors

Advantages	Guarantees the quality of inputs and the supply of stock
Disadvantages	Entering into new markets may affect core activities as resources and expertise need to be shared

Advantages	Cuts out the middle man leading to increased profits
Disadvantages

Advantages	More limit supplies to competitors
Disadvantages

An example of forward and backwards integration for Ford Motor Company:

Forward vertical integration

Forward vertical integration is when Ford buy out or merge with their customers, which in this case could be a car showroom (e.g. Arnold Clark).

Backward vertical integration

Backward vertical integration would be when a company like Ford buy out or merge with their suppliers. Suppliers to a major automobile manufacturer could be car electrics, glassmakers or in this example a rubber plantation which is used to make tyres for the car wheels.

Diversification

Diversification is when firms move into new markets that are different from their core business.

– when a business moves into an entirely different market for example a grocery store merging with a bank, or a company like Ford (car manufacturing) merging with Nokia (technology and communications)

Lateral integration – when a business moves into a different market but within a related industry for example a hairdresser merging with a beauty therapist

Advantages	Disadvantages
Spreads risk across different markets	Entering into new markets may affect core activities as resources and expertise need to be shared
Targets new markets increasing customer base	May not have the knowledge required to successfully run the new business
Business gains customers and assets from the acquired business
Experience/knowledge can be gained from the acquired business

Advantages	Spreads risk across different markets
Disadvantages	Entering into new markets may affect core activities as resources and expertise need to be shared

Advantages	Targets new markets increasing customer base
Disadvantages	May not have the knowledge required to successfully run the new business

Advantages	Business gains customers and assets from the acquired business
Disadvantages

Advantages	Experience/knowledge can be gained from the acquired business
Disadvantages

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