The Growth of Firms (Cambridge (CIE) O Level Economics)
Revision Note
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 Tip
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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