Business Growth – Organic Growth, External Growth, Merger, Acquisition, Diversification, and Forward and Backward Integration

  • The benefits that business growth brings to its owners and shareholders are:
  1. Increase in total profit.
  2. High status and market prestige.
  3. Decrease in operation costs per capita due to economies of scale.
  4. Increase in proportion of market share which can create market dominance or monopoly that gives the business great leverage when dealing with suppliers. It can even set the price of products it purchases from these suppliers.
  • There are two main ways in which a business can grow: internal growth and external growth.
  • Internal growth basically means that the business expands its operations, e.g a retail store opening new branches in different cities. This form of growth is usually slow but easily manageable. In most cases, profits made in existing business operations is used to fund internal growth. It is also called organic growth.
  • External growth means that the business acquires another existing business, either through an acquisition or a merger.
  • Merger means that the owners of the business agree to have their businesses joined into one business, while acquisition means that one business buys another business and thus the owner of the bought business cedes ownership of the business once (s)he has been paid the agreed amount of money. Acquisition is also called takeover. A merger or acquisition is considered an integration because the operations of two or more businesses are synchronized and merged together to fit the business operation of a single business, i.e operations of two or more business are integrated together so as to create a single business operation.
  • The main types of external growth are:
  1. Horizontal Merger: This occurs when the business acquires an existing business in its stage of production in the same industry or market sector e.g a shoe retail store acquires another shoe retail store. It is also called horizontal integration. Horizontal integration increases the market share of the (new) combined business, while decreasing the number of competitors in a market. It can also create economies of scale.
  2. Vertical Merger: This occurs when the business acquires an existing business in a different stage of production in the same industry or market sector e.g a furniture company acquiring a lumbar company. It is also called vertical integration. This vertical integration can be:
  1. Forward Integration – The business acquires an existing business whose stage of production is closer to the end consumer, e.g a furniture company acquiring a furniture retail store. Forward integration gives a business a better access to the consumer, as well as access to information about consumer preferences and needs.
  2. Backward Integration – The business acquires an existing business whose stage of production is closer to the primary sector e.g a furniture company acquiring a forested land. This assures the business a steady supply of raw materials for producing its products, as well as denying competitors access to the supplier, besides allowing the business to influence the cost of raw materials (or components) in the market so as to increase production costs for rival businesses.
  3. Conglomerate Merger: This occurs when the business acquires an existing business in a different industry or market sector. This is also called diversification or conglomerate integration. For example, a furniture company acquiring a real estate company. It allows for risk to be spread across different industries, in addition to sharing of ideas across the industries.
  • Business growth can also present problems such as:
  1. Inability to effectively control the integrated business.
  2. Incompatibility of business operations such as management styles and work ethics in the 2 or more businesses being merged together.
  3. Poor communication with staff acquired from merged businesses.
  4. High cost of mergers and acquisition can make business expansion quite costly.
  • Decentralization of business operations by allowing the separate units of the combined business to run their affairs with a relative high degree of autonomy in business decisions and execution of business strategies can help alleviate the problem posed by poor communication, challenges in control, and difficult integration of business operations.
  • Some businesses are forced by circumstances to stay small, and the 3 main causes of this are:
  1. Type of Business: If the business offers personalized services to its consumers, e.g hairdressing, then it is difficult to grow as growth increases the customer pool which causes the business to lose its close personal touch with its individual customers.
  2. Market Size: A small market size with a limited pool of the target consumer base compels a business to stay small. This explains why specialist business that cater for niche luxury markets remain small and avoid mergers or acquisitions.
  3. Preference of Owner: Some business owners want to keep their businesses small, mostly because it allows to easily control it.
  • Not all businesses are successful, and some fail. The main reasons why businesses fail are:
  1. Poor management usually caused by lack of experience in running a business.
  2. Over-expansion or poor though-out expansion that leads to dysregulated cash flows and budgets.
  3. Poor financial management can lead to shortage of liquid cash and piling debts that can result in insolvency. Insolvency simply means inability of a business to pay debts.
  4. Poor change management or inability to plan for change in a highly fluid business environment. Usually, this change is caused by new competitors entering the market, new technology, or sudden changes in local economies e.g lockdown to limit the spread of SARS-CoV-2 has caused nightclubs and bars to close down.
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