Chapter 13

Expansion of Firms
(Book 2 : Chapter 12)

Internal vs External Expansion

1. Internal Expansion means a firm expands by increasing its scale of production within its
existing operation and management structure. e.g. setting up a new branch on its own
2. External Expansion means a firm expands by increasing scope of production by combining
with other firms. e.g. takeover

Types of Expansion (Integration)

A. Horizontal Expansion
It occurs when a firm expands into a business that is engaged in the same stage of production
of the same product (including related and competing products).
e.g. A T-shirt manufacturer sets up another factory manufacturing T-shirts (or shirts) or
integrates with another T-shirt (or shirt) manufacturer.

B. Vertical Expansion
It occurs when a firm expands into a business that is engaged in different production stages of
the same product.
1. Vertical Backward Expansion
It occurs when the firm expands into a business in a previous stage of production.
e.g. computer manufacturer  hard disk manufacturer (input of a computer)
2. Vertical Forward Expansion
It occurs when the firm expands into a business in a later stage of production.
e.g. computer manufacturer  computer shop (for marketing of computer)

C. Lateral Expansion
It occurs when a firm expands into a business of related but not competing products.
e.g. a garment manufacturer with a table-cloth manufacturer

D. Conglomerate Expansion
It occurs when a firm expands into a business of unrelated products.
e.g. a garment factory with a restaurant

Expansion of Firms Page 1

Motives of Expansion

Types Specific Motives General Motive

 Reduce the number of firms in the industry so as to

reduce competition.
Horizontal
 Increase the market share and market power to
Expansion
control the supply of products and influence the
market price.
 Avoid duplication of resources and use resources
more efficiently

 Guarantee the source of Increase the scale of

Vertical
supply of resources so as to production to enjoy
Backward Reduce the cost of
avoid the bottlenecks due to economies of scale to
Expansion trading inputs and
inadequate supply of reduce the average cost
outputs such as the
resources. of production
cost of searching
(especially financial
for information,
 Ensure a steady market outlet negotiation,
economies of scale to
Vertical
for its product. enjoy lower bank
Forward contracting,
 Collect market information interest rates).
Expansion packaging,
and adapt to changes in monitoring, etc.
market demand more rapidly.

 Diversification of products and markets to spread

Lateral &
risk in investment. Loss in one business may be
Conglomerate
compensated for by a gain in another.
Expansion
 Benefit from the popularity of the brand name and
goodwill of another firm. (OR extend the popularity
of its brand name to other products)
 Have more flexible use of resources. When market
demand for one type of product drops, the firm can
use its resources to produce other products.

Expansion of Firms Page 2

Exercise:

Browse the official websites of several large corporations. Find FIVE real-life examples of
expansions/ integration).

NOTE:
1. You should try to raise examples for at least four different types of expansion/
integration. For example, you cannot just raise all the 5 examples related to horizontal
expansion.

2. Answer format:
- xxx company  yyy company (horizontal integration)
- AAA company  BBB company (vertical forward expansion)

3. In order to make the task simple, you are NOT required to show the websites/links..

4. We can accept ONE of non-real-life example if you really have difficulties in finding them.

Hint: Is wine-making related to the main business of Cheung Kong?

How about this one?

Expansion of Firms Page 3