Inorganic Growth Flashcards
What is inorganic growth ?
Firms can grow inorganically through merging with, acquiring or taking over another firm.
What is vertical integration ?
Occurs when a firm merges with or takes over another firm in the same industry, but a different stage of production
What is Forward vertical integration ?
Occurs when the firm integrates with another firm closer to the consumer.
This involves taking over a distributor.
ie A coffee producer might buy the café where the coffee is sold.
What is Backward vertical integration ?
Occurs when a firm integrates with a firm closer to the producer. This involves gaining control of suppliers.
ie A coffee producer might buy a coffee farm.
Pros ?
o Firms can increase their efficiency, through gaining economies of scale, which could reduce their average costs. This could result in lower prices for consumers
o Firms can gain more control of the market. Backwards integration can mean that firms can control the price they pay for their supplies, and they could raise the price for other firms. This could give them a cost advantage over their competitors
o Firms have more certainty over their production, with factors such as quality, quantity and price.
Cons ?
o The disadvantages associated with diseconomies of scale could be considered
o Vertical integration can create barriers to entry, which might discourage or limit the
entrance of new firms. This could lead to a less efficient market, since the firm has little incentive to reduce their average costs when their market share is high.
What is Horizontal integration ?
This is the merger of two firms in the same industry and the same stage of production.
ie If a car manufacturer merges with another car manufacturer, they will have horizontally integrated.
Pros & Cons ?
o Firms can grow quickly, which can give them a competitive edge over other firms in the market. However, this could lead to monopoly power and there is the potential of lower inefficiency as a result.
o There could be disagreements in the objectives of the two firms which merged.
o Firms can increase output quickly, so they can take advantage of economies of scale.
o The two firms will have expertise in the same industry, so the merged firm can gain
advantages, such as in marketing.
