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The Growth of Firms


Firms can grow in one of two ways:

  • Internal growth.
  • External growth.


Internal Growth

This requires an increase in sales.  In order to do this the firm will have to promote existing products and launch new products, this will require an increase in productive capacity.  It can finance growth via borrowing, retaining profits (internal funds) or issuing new shares.


External Growth

Mergers and takeovers are ways in which businesses can grow externally and grow by joining together to form one company.


Mergers are mutual agreements between the companies involved to join together.  Most takeovers tend to be hostile, in that the company being taken over does not want to be bought by the larger business.  Takeovers do not need to be and are not always hostile, as some in fact can be friendly, in that the company being taken over wants to be taken over and can even ask to be taken over.


Why Do Companies Join Together?

  • It is the quickest and easiest way to expand.
  • Buying a smaller competitor is normally cheaper than growing internally.
  • Simple survival – survival of the fittest.  To continue in the market the company may need to grow and the easiest way is to buy up someone else.
  • The main aim of the business may be expansion.
  • Investment purposes.  Buying up other businesses is a form of investment.
  • To prepare for the European Single Market.
  • To asset strip.  Some companies buy other companies in order to sell off the most profitable assets of the business and make a profit.
  • To gain economies of scale.


Types of Merger/TAKEOVER

  • Horizontal: A horizontal merger/takeover is one where two businesses in exactly the same line of business or stage of production join/merge with on another, for example if two hairdressers joined together.
  • Forward Vertical: A forward vertical merger/takeover is where a business merges with a business at the next stage of the production process, for example a business making furniture may merge with the retail outlet selling the furniture.
  • Backward Vertical: A backward vertical merger/takeover is where a business merges with a business at the previous stage of the production process, for example the business making the furniture may merge with the business that supplies the wood and parts for the furniture.
  • Lateral: A lateral merger/takeover is where a business merges with a business who makes similar goods to it but who are not in competition with each other, for example if a chocolate bar manufacturer merged with a luxury chocolate manufacturer.

·        Conglomerate/Diversification: A conglomerate/diversification merger or takeover is where businesses in completely different industries merge together, for example if a football club merged with a computer firm.


Joint Ventures

Some businesses join forces with other businesses to share the cost of a project because it is too expensive for one business, share expertise of staff and machinery etc.  This is known as a joint venture.  The benefits of joint ventures are:

  • Businesses have all the advantages of merges but no lose of company identity.
  • Each business can specalise in its field of expertise.
  • Expensive costs of mergers/takeovers are not incurred.
  • Mergers/takeovers can be unfriendly and do not work – staff are concerned about job losses.
  • Competition may be reduced due to joint venture.


Drawbacks of joint ventures:

  • Anticipated benefits of the venture may not appear due to difficulties of running ‘one’ business for the venture.
  • Disagreements about who is in charge can result.
  • As profits are normally split this could cause problems if one business feels it has put more effort, time, money than the other.


Mergers were very common during the late 1980’s with many companies merging with competitors and other businesses.  Whereas towards the end of the 1990’s most companies have decided that large companies with numerous businesses is in fact bad and leading to un-competiteveness (due to dis-economies of scale), this has lead to a trend of firms de-merging.

More and more mergers took place across borders within the EU, as shown in the table below.





E-mail Steve Margetts