Firms can grow
• By investing in more capital by
borrowing more money, raising more
funds from owners or by keeping some
of the profit back in business.
Firms can grow
• Through INTEGRATION-when one firm
combines with another business.
• This can happen in any two ways:
• By a merger-a friendly deal where two
businesses join together (each business owns
a share of the other business for mutual
• By a takeover-a forced and sometimes
hostile deal where one firm buys a share of
the other business.
Integration can take
place in two directions• HORIZONTAL integration. This occurs
when firms in the same industry and at
the same stage of the production
process combine to form a larger
• For example: a merger between two
banks - Westpac and Trustbank
• It reduces competition, thus increases market
• Increase in market power
• It has greater control on prices to make more
• Gain new ideas from the other business
• As its scale of operations is greater, it may
experience economies of scale (decrease in
average costs=efficient use of resources=more
• The new business may not need all of the workers.
They could remove some workers to become
efficient and make more profit
• The businesses may have different objectives
• It costs a lot of money to merge with or
takeover another business
• Communication problems
• They may have to pay higher prices due to
lack of competition
• Less choice
• This occurs when a firm expands by
combining with an existing business in the
same industry but at a different stage of
the production process.
• This can be Backward or Forward
• Forward Vertical Integration - where a
firm buys into another in a later stage of
• For example, a group of farmers buys
the local milk processing plant.
• Backward Vertical Integration - where
a firm buys into another firm in an
earlier stage of production. For
example, when KFC buys the country’s
biggest poultry (chicken) processing
• Forward integration involves
integrating with customer
firms to ensure retail outlets
• Backward integration
involves integrating with a
“input” supplier to reduce
supply costs (or guarantee
Your homework task
• Think of an example of vertical
• Draw this in your book
Advantages of vertical
• It has the advantage of cutting costs by reducing the
profits, or reducing costs made at different stages of
It also controls the quality and delivery of materials
right through the production process.
• Increase entry barriers to potential competitors
• Increased control of the market.
• Better able to deal with any periods of shortage.
Disadvantages of vertical
• Increase in costs e.g. May need to
appoint staff to run the business
• Inexperience in the field could prove
• Possible diseconomies of scale that
may arise in terms of administration
• Decreased ability to increase product
Firms can also expand by
diversification. This involves take over
or merger with another firm in an
When a firm increases the range of
businesses it is involved in, it may develop
into an industrial combine, or
For example: Mitsubishi
• A market gardener whose property is
next to a McDonalds car park. The
market gardener turns part of his
property into a mini-golf course to make
additional income from the crowds who
stop for takeaways.
Firms diversify for a number of reasons:
To spread their risks. When sales in one
industry are depressed, other industries
provide more buoyant sales
To obtain other revenue sources, (so that it
is not dependent on one market).
To increase the range of products they make
To develop into a conglomerate.
Take advantage of existing expertise,
knowledge and resources in a company.
• May result in the slowing growth of its
• Adding management costs.
• Losses may incurred during the market
• Complex dealings with the legal
requirements of different countries.
Your task 2
• Think of an example diversification
• Draw this in your book
• Be creative……….
• I may actually award a prize for the
most original, but logical
Identify the form of
business growth which is used in each
of these situations
1. A garage agrees to merge with another garage
2. A bicycle retailer decides to expand by buying a
shop in another town
3. A fruit juice firm buys a fruit farm
4. A business making electrical goods agrees to join
with retail shops specialising in electrical goods
5. A mining firm takes over a firm supplying mining
6. A construction company buys a holiday company