The Growth of Firms (Cambridge (CIE) IGCSE Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Internal and External Growth
The growth of firms can be organic (internal) or inorganic (external)
Organic growth is usually generated by
Gaining greater market share
Product diversification
Opening a new store
International expansion
Investing in new technology/production machinery
Inorganic growth usually takes place when firms merge in one of three ways
Vertical integration (forward or backwards)
Horizontal integration
Conglomerate integration
Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain
E.g. A dairy farmer merges with an ice-cream manufacturer
Backward vertical integration involves a merger/takeover with a firm further backward in the supply chain
E.g. An ice-cream retailer takes over an ice-cream manufacturer
Types of Mergers
Firms will often grow organically to the point where they are in a financial position to integrate with others
Integration speeds up growth but also creates new challenges
An Explanation of the Advantages and Disadvantages of Each Type of Growth
Type of Growth | Advantages | Disadvantages |
---|---|---|
Organic |
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Vertical Integration |
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Horizontal Integration |
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Conglomerate Integration |
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Examiner Tips and Tricks
Paper 1 MCQ frequently tests your ability to differentiate between forward vertical and backward vertical integration. This is all about a supply chain for a good/service. If a firm takes over another at an earlier stage in the supply chain - it is vertical backward integration.
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