Definitions:

7
External growth/integration: business expansion achieved by means of merging with or taking over
another business, from either the same or a different industry
Synergy: means that the whole is greater than the sum of parts, so in integration it is often assumed that the
new, larger business will be more successful than the two, formerly separate, businesses were
Merger: an agreement by shareholders and manages of two businesses to bring both firms together under a
common board of directors with shareholder in both businesses owing shares in the newly merged business
Takeover: when a company buys more than 50% of the shares of another company and becomes the
controlling owner of it - often referred to as ‘acquisition’

Types of business integration and their impact

Type of integration Advantages Disadvantages Impact on stake holders

Horizontal - eliminates one -rationalisation may bring -consumers now have less
 integration competitor and can bad publicity choice and workers may lose
integration with firms benefit from possible -may lead to monopoly job security as a result of
in the same industry economies of scale investigation if the rationalisation
at the same stage of -scope for rationalising combined business exceeds
production production certain market share limits
increased power over
suppliers

Vertical integration - -business is now able -consumers may suspect -workers may have greater
forward integration control the promotion uncompetetive activity and job security because the
with a business in the and pricing of its own react negatively business has secure outlets
same industry but a products -lack of experience in this -there may be more varied
customer of the -secures a secure outlet sector of industry - a career opportunities
existing business for the firms products successful manufacturer -consumers my resent lack
does not necessarily make of competition in the retail
a good retailer outlet because of the
withdrawal of competitor
products

Vertical integration -gives control over -may lack experience of -possibilty of greater career
backward integration quality, price and managing a supplying opportunities for workers
with a business in the delivery times of company - a successful -consumers may obtain
same industry but a supplies steel producer will not improved quality and more
supplier of the -encourages joint necessarily make a good innovative products
existing business research and manager of a coal mine -control over supplies to
development. -supplying business may competitors may limit
-business may now become complacent due to competition and choice for
control supplies of having a guaranteed consumers
materials to customer
competitors

Conglomerate -diversifies the business -lack of management -greater career opportunities

integration away from its original experience in the acquired- for workers
integration with a industry and markets business sector -more job security because
business in a different -this should spread risk -there could be a lack of risks are spread across more
industry and may take the clear focus and direction that one industry
business into a faster- now that the business is
growing market spread across more than
on industry

Synergy and integration

When two businesses are integrated the argument is that the bigger firm created in this way will be more
effective, efficient, and profitable than the two separate companies. Why is this so?
  The 2 businesses might be able to share research facilities and pool ideas that will benefit both of
the businesses
 Economies of operating a larger scale of business, such as buying supplies in large quantities, should
cut costs
 The new business can save on marketing and distribution costs by using the same sales outlets and
sales teams

many examples of business integration have not increased shareholder value for the following reasons:
 The integrated firm is actually too big to manage and control effectively (diseconomy of scale)
 There may be little mutual benefit from shared research facilities or marketing and distribution
systems if the firms have products in different markets
 The business and management culture

Joint ventures and strategic alliances

Strategic alliances are agreements between f rms in which each agrees to commit resources to achieve an
agreed set of objectives. These alliances can be made with a wide variety of stakeholders, for example:
● with a university – finance provided by the business to allow new specialist training courses that
will increase the supply of suitable staff for the firm
● with a supplier – to join forces in order to design and produce components and materials that will
be used in a new range of products; this may help to reduce the total development time for getting
the new products to market, gaining competitive advantage
● with a competitor – to reduce risks of entering a market that neither firm currently operates in.
Care must be taken that, in these cases, the actions are not seen as being ‘anti-competitive’ and, as
a result, against the laws of the country whose market is being entered.
Problems of rapid growth
Potential problem How this affects the business
from rapid growth
FINANCIAL - business expansion can be
expensive
- takeovers can be particularly
expensive
- additional fixed capital and
working capital will be required
MANAGERIAL - existing management may be
unable to cope with problems of
controlling larger operations
- there may be lack of
coordination between the
divisions of an expanding
business
MARKETING - original marketing strategy may
no longer be appropriate for a
larger organisation with
- growth from national to
international markets may not
succeed if market strategies are
not suitably adapted
LOSS OF CONTROL - most likely to occur if a sole
BY ORIGINAL trader takes on partners or if a
OWNERS private limited company
converts to a public one
Possible strategies to deal with the problem
- use external sources of finance when
possible e.g. retained earnings
- raise finance from share issues
- offer shares in the new business
rather than making a cash offer to
the shareholders of the target
business
- new management systems and
structures may be required: a policy
of delegation and empowerment of
staff should reduce pressure on top
staff
- decentralisation, for example
allowing national divisions
reasonable autonomy, could provide
motivated managers with a clear
local focus
- original owner may need to decide
which are the most important areas
of the business to remain heavily
involved with, and relax control over
others
- adopt focused marketing strategies
for each specific product or each
country operated in – if this is what
the results of market research
indicate is essential
- almost an inevitable consequence of
changing legal structure to gain
additional capital, but original
owners could try to remain as
directors