Many businesses have an objective and that is to grow in size. Keeping Growth as an objective has its own advantages for the business.
Why businesses set growth as an objectives
- Possibility of higher profits
- More and salaries for managers
- Economies of scale
How can businesses expand?
Business can expand is two main ways:
Internal Growth or also known as organic growth where the business expands by opening more outlets/factories/offices gradually by using its profits.
External growth involves buying out other business and making them a part of your business. Examples are takeovers and mergers.
Integration can be of three types
Horizontal Integration: when one firm merges with another firm or takes over another one in the same industry and at the same stage of production. Example Vodafone and Hutch
Vertical Integration: one firm merges or take over another firm in the same industry but at a different stage of production. Vetical Integration can be either forward or backward.
Example of vertical integration The world’s 4th largest steelmaker POSCO is bidding to purchase the world’s 3rd largest shipbuilding company Daewoo Shipping & Marine Engineering (DSME). While both firms are Korean, they are also multinationals (and therefore of interest to us). POSCO believes it can add considerable value to DSME by specifically tailoring its steel the specifications of the ships being built. Steel is a very significant input in ship building. As such, this can be seen as forward integration by POSCO into one of the activities where its major products are used.POSCO is also putting efforts to buy iron-ore and coal mines in Australia. It has significant share-ownings in seven such Aussie firms. Both iron-ore and coal are major inputs in making steel, so this is backward integration. POSCO is looking at other mines in Africa, Siberia, Indonesia and Eastern Europe, and says it is looking to own 30% of its input supplies in the future.
Backward Integration is when a business merges or takes over a business which takes it near to the source of raw materials. For example an oil refinery combined with another firm which is into oil driling.
Forward Integration is when a business merges or takes over a business which takes it near to the customers. For example, an oil refinery is combined with company which owns Petrol stations.
Conglomerate Integration: It is also known as lateral integration. Take over or merge with another firm in a completely different industry. example a shoe manufacturer buys a biscuit producing business.