Organic growth – when you grow your business internally, using: management, marketing/sales and strategic planning.
This can be achieved through increasing production, opening more branches, new product development, R&D and widening the customer base. It grows from within using its own resources, and growth comes only from expanding output or sales.
Inorganic growth – when a firm grows externally through: joint ventures, strategic alliances and takeovers.
Inorganic growth can be much quicker, increasing the size of a business suddenly. It is mainly achieved through takeovers or mergers.
Mergers – two businesses join together to form a new single business (approved by shareholders and managers).
Takeover – a business buys over 50% of the shares in another business and become it’s new owner – can be through mutual agreement (friendly) or hostile e.g. Cadbury’s/Kraft.
Why do businesses merge?
- Reducing competition (through merging with rivals)
- Diversification of product range means falling sales for one product will have a lower impact on the whole business
- Defensive reasons: smaller firms may join together to stand up to a larger rival
- Acquisition of brand names: Nestle paid five times the market value of Rowntree in 1988 to get the KitKat brand
- Entering a new market segment: Unilever took over Ben and Jerry’s as they wanted to enter the ice cream market
- Rationalisation: lowered costs e.g. shared overheads, as only one head office needed.
- Synergy: merged businesses become stronger than the sum of their parts as they increase efficiency, grow faster, and compliment each other strengths e.g. Morrisons was stronger is the North and took over Safeway which had a stronger profile in the South.
HORIZONTAL, VERTICAL AND CONGLOMERATE GROWTH
Horizontal integration – two businesses in the same industry have joined together e.g.Morrisons and Safeway were both supermarkets.
Vertical integration – merging two businesses in the same industry but at different stages of the production process or supply chain.
There are two types of vertical integration: forwards vertical integration involves a firm integrating with a business closer to the consumer e.g. a manufacturer moving into the distribution process, and backwards vertical integration which means a firm integrating with a business closer to the producer e.g. a coffee producer acquiring a coffee plantation.
Conglomerate integration – when two businesses in different industries, with no common connection between them e.g. Tata Steel has acquired Jaguar Land Rover, and Tetley