Unit 1.

6 Growth and evolution

1.5.1 Economies and diseconomies of scale

Define the two terms:

(a) Economies of scale - Economies of scale are cost advantages reaped by companies when
production becomes efficient. Companies can achieve economies of scale by increasing
production and lowering costs. This happens because costs are spread over a larger
number of goods.
(b) Internal economies of scale - An internal economy of scale measures a company's
efficiency of production. That efficiency is attained as the company improves output
when the average cost per product drops. It happens when a company is able to achieve
lower costs through buying power, patents, or special technology or financial (e.g. low
cost loans) The lowest possible of cost.
(c) Diseconomies of scale: Diseconomies of scale happen when a company or business
grows so large that the costs per unit increase.
(d) Optimum quantity level shown by Q in the diagram below- a normative monetary policy
conclusion drawn from the long-run properties of a theoretical model
1.5.1a: Internal economies of scale

Describe the following internal economies of scale:

(i) Technical economies of scale.

 a. Technical economies of scale result from efficiencies in the production process
itself.
b. E.g.
i. Dividing production processes into separate tasks makes workers more
efficient in focusing on one role and specialized in their area of expertise.
ii. Cutting unit costs by using mass-production methods like specialized
machinery.
iii. Increasing dimensions of storage or delivery containers, for example, to
increase the capacity of stored units and the ability to ship larger
quantities.
(ii) Managerial economies of scale.
a. Managerial economies of scale occur when large firms can afford specialists.
They more effectively manage particular areas of the company. For example, a
seasoned sales executive has the skill and experience to take care of big orders.
They demand a high salary, but they're worth it.
b. Investing in expertise is one way to grow economies of scale, where specialist
managers can enhance production systems to streamline processes and increase
productivity. When large companies have the resources to afford specialists, they
can manage different divisions of the company more effectively and optimally.
(iii) Financial economies of scale
a. Financial economies of scale mean the company has cheaper access to capital. A
larger company can get funded from the stock market with an initial public
offering. Big firms have higher credit ratings and can offer lower interest rates on
their bonds.
(iv) Specialisation economies of scale
a. As labor is divided amongst workers, workers are able to focus on a few or even
one task. The more they focus on one task, the more efficient they become at this
task, which means that less time and less money is involved in producing a good.
(v) Marketing economies of scale
a. Marketing economies of scale entails large firms lowering the unit cost of
promotion and advertising. Marketing economies of scale may be caused by the
ease of access to many effective marketing media markets.
(vi) Purchasing economies of scale
a. They are economies of scale achieved via buying in bulk. That is, larger
businesses more readily have the cash and output to warrant buying materials in
much larger quantities, which can bring them per-unit cost advantages smaller
businesses are otherwise unable to achieve.
(vii) Risk-bearing economies of scale.
a. The ability of large firms to spread risks over a large number of investors. This
can result in the diversification of location- or production plant-specific risks-thus
reducing the effective risk facing investors.
Explain the benefits to a business of having significant internal economies of scale.

(b) Internal diseconomies of scale

Internal diseconomies of scale involve either technical constraints on the production process that
the firm uses or organizational issues that increase costs or waste resources without any change
to the physical production process. These results from mismanagement leading to inefficiency
and higher unit cost of production.

Describe the following internal diseconomies of scale:

(a) Lack of control and coordination.

a. A lack of coordination in an organization can decrease productivity, complicate
processes and delay the completion of tasks. In order to coordinate the efforts of
an entire organization, the organization requires a systematic integration of a
process that creates accountability within the organization.
(b) Poor working relationships
a. Internal diseconomies of scale are diseconomies of scale that occur inside the firm
and are within its control. They occur mainly due to managerial problems. As a
result of being too big, hence poorly managed, the firm becomes inefficient. The
inefficiency leads to higher unit costs of production.
b. Communication problems reduce management efficiency. With a larger
workforce and more departments, managers are more likely to lose touch with
those lower down in the hierarchy as they may no longer be able to communicate
directly with workers, thereby making them feel distanced. This can lead to poor
decision-making and more mistakes.
i. Example 2: In 2018, Walmart, the world’s largest private employer with
2.3 million associates announced that it will now let employees use their
own mobile phones at work for work purposes. Employees who volunteer
for the Bring Your Own Device (BYOD) program will download Walmart
apps, so that once they clock in, they can check inventory and prices, scan
products, review sales data and accomplish other tasks.
c. Because of the need to communicate with more workers and longer time to pass
the message around the whole organization, wider spans of control and longer
chains of command can cause communication problems including slowing down
decision-making and damaging communication flows:
i. Wider span of control. If a business becomes too large, managers face
wider spans of control than in smaller companies. A wide span of control
means that a single manager is responsible for managing larger number of
workers on daily basis.
ii. Longer chain of command. Chains of command also tend to be longer in
bigger firms as there are many layers of management. Hence, it will take
 longer for the top management to communicate messages down the line to
the workers at the bottom of the organizational structure, and then wait for
feedback.
iii. Lack of feedback. Large-scale operations lead to poor feedback to and
from workers due to waiting time, hence reducing worker incentives. It
may increase the use of non-personal communication media, cause
communication overload and create distortion of messages. Morale of staff
will be negatively impacted, thereby reducing productivity leading to
higher unit costs.
d. All of these communication inefficiencies may cause inadequate and delayed
information, or even prevent the really important messages being acted upon in a
timely manner.
(c) Boredom from over-specialisation
a. Lower productive efficiency is likely to be the result of working relationships in
an oversized business suffering from lack of specialization and poor division of
labor. On one hand, workers become bored with performing repetitive tasks, and
on the other, with larger workforce, there may also be scope for slack and
procrastination. In very large businesses, managers may no longer have an
opportunity for a day-to-day contact with workers causing employee morale to
deteriorate. This can lead to demotivation as workers feel that they are no longer a
valued part of the business. And as a consequence, leading to poor product quality
and high labor turnover.
(d) Bureaucracy
a. The amount of bureaucracy (e.g. larger administration, redundant paperwork,
longer processes, stricter company policies, etc.) increases as the business grows.
This makes decision-making more time consuming for everybody adding to the
costs of the business. Bureaucracy can also make business communication more
difficult, thereby worsening working relationships that will lead to higher unit
costs. Unfortunately, bureaucracy is unlikely to contribute to any extra output of
goods and services for the customer.
(e) Complacency
a. Complacency equals problems. Complacency means self-satisfaction with being a
large and dominant player, or even the market leader, while accompanied by
unawareness of actual dangers of competitors and company’s own deficiencies.
Complacency is most likely going to reduce productivity as workers and
managers keep on relying on their previous successes. Reduced productivity will
thereby raise unit costs of production.
1.5.1b: External Economies of scale

Define the term external economies of scale.

Any industry-wide effects that make it more difficult or more costly to perform business
operations is called an external diseconomy of scale. Common examples include taxes,
regulations, or resource constraints.

Describe the following external economies of scale:

(i) Technological progress.

a. Advancements in technology increase the productivity within the whole industry.
With better, faster and more precise machinery, companies can produce goods
and provide services faster, or produce many more goods and provide more
services within the same period of time. Technological progress also makes it
easier and faster for managers to reach final customers.
(ii) Improved transportation network.
a. External economies of scale can also be realized from the above-mentioned inputs
as a result of the company's geographical location. Thus, all fast-food chains
located in the same area of a certain city could benefit from lower transportation
costs and a skilled labor force.
b. Having developed industry infrastructure already in place such as railways,
highways and airports will support business growth in many areas.
c. Improved transportation networks help to ensure prompt deliveries of raw
materials to companies and final products to customers.
d. With reliable means of transportation workers will arrive to work on time
therefore eliminate wasting valuable time.
e. More efficient packaging with bigger containers (e.g. trains and ships) reduces
transportation costs per product. Therefore, transporting larger quantities leads to
lower average costs.
(iii) Abundance of skilled labour.
 a. as an industry grows in an area, there is likely to be an abundance of skilled
workers around that location. This makes it easier for firms to recruit new workers
and also reduces the training costs they might otherwise incur.
b. An abundance of skilled labor might exist in the local area. This provides local
businesses with a suitable pool of high-quality employees, thereby helping to
reduce external recruitment costs without compromising productivity levels.
Labor pooling happens when a large and concentrated industry attracts a pool of
workers, hence reducing employee search and hiring costs.
(iv) Regional specialization
a. Regional specialization means that a particular location or country has a highly
regarded and trustworthy reputation for producing a certain product. This allows
the industry to benefit from easier access to specialist labor, sub-contractors and
suppliers, thus helping to reduce average costs of production.

External diseconomies of scale

(i) Higher rent

a. Too many businesses wishing to locate their offices or factories in a certain area
can cause available rental inventory to become scarcer, thereby increasing rent
prices. Higher rent adds to the Fixed Costs of all businesses in the area without
any corresponding increase in output causing unit costs to rise.
(ii) Rising wages and financial rewards
a. Since workers have greater choice from a large number of employers being
located in the local area, it may take much longer for companies to sign new
employees. Many of the job seekers may delay signing their labor contracts trying
to negotiate a better deal putting one company to bet against the other.
b. Due to higher demand for quality workers, businesses might be forced to offer
increased wages and financial rewards to retain the best workers, or to attract new
staff. This will increase labor costs without necessarily increasing output anyhow,
thereby raising average costs of production.
(iii) Traffic congestion-
a. Traffic congestion results from too many businesses operating in the same area.
And congestion increases business costs whilst reducing revenues. Employees
 who are late to work due to poor transportation links will cost the business lost
sales. Deliveries to customers are likely to be delayed due to overcrowding,
therefore customers will choose to buy from other businesses located more
conveniently closer to their homes. Increases in transportation costs caused by
higher usage of gasoline will contribute to an increase in unit costs of production.
(Although there is no study about the economic loss due to traffic congestion in Hong Kong,
the United States has suffered from the total cost of traffic congestion of US$121 billion in
2011 . One of the major reasons is that employee productivity is greatly reduced after
encountering traffic jams.)

1.5.2 Internal vs External growth

1.5.2a: Internal growth (organic growth)

Describe the term internal growth.

Internal growth, also known as organic growth, occurs when a company uses its own tools and
resources to expand. In most cases, this involves increasing production, developing new products
or services or other developmental strategies.

How is it financed?

Using the Ansoff’s matrix, describe the strategies a business can use to grow internally.
 1. Market penetration-More outlets; marketing; expand output; hire more resources (capital;
land; workers) The concept of increasing sales of existing products into an existing
market
2. Market development- Sell other countries (exporting; subsidiaries; agents) Focuses on
selling existing products into new markets. Focuses on introducing new products to an
existing market
3. Product development- Create new products through R&D.
4. Diversification- New products in new markets. The concept of entering a new market
with altogether new products

Market Penetration

- The least risky, in relative terms, is market penetration.

- When employing a market penetration strategy, management seeks to sell more of its
existing products into markets that they’re familiar with and where they have existing
relationships. Typical execution strategies include:
o Increasing marketing efforts or streamlining distribution processes
o Decreasing prices to attract new customers within the market segment
o Acquiring a competitor in the same market
- Consider a consumer packaged goods business that sells into grocery chains.
Management may seek greater penetration by amending pricing for a large chain in order
to secure incremental shelf space not just for packaged food products but also for several
lines of its pet food products, too.

Market Development

- A market development strategy is the next least risky because it does not require
significant investment in R&D or product development. Rather, it allows a management
team to leverage existing products and take them to a different market. Approaches
include:
o Catering to a different customer segment or target demographic
o Entering a new domestic market (regional expansion)
o Entering into a foreign market (international expansion)
- An example is Lululemon; management made a decision to aggressively expand into the
Asia Pacific market to sell its already very popular athleisure products. While building an
advertising and logistics infrastructure in a foreign market inherently presents risks, it’s
made less risky by virtue of the fact that they’re selling a product with a proven roadmap.

Product Development
 - A business that firmly has the ears of a particular market or target audience may look to
expand its share of wallet from that customer base. Think of it as a play on brand loyalty,
which may be achieved in a variety of ways, including:
o Investing in R&D to develop an altogether new product(s).
o Acquiring the rights to produce and sell another firm’s product(s).
o Creating a new offering by branding a white-label product that’s actually
produced by a third party.
- An example might be a beauty brand that produces and sells hair care products that are
popular among women aged 28-35. In an effort to capitalize on the brand’s popularity
and loyalty with this demographic, they invest heavily in the production of a new line of
hair care products, hoping that the existing target market will adopt it.

Diversification

- In relative terms, a diversification strategy is generally the highest risk endeavor; after all,
both product development and market development are required. While it is the highest
risk strategy, it can reap huge rewards – either by achieving altogether new revenue
opportunities or by reducing a firm’s reliance on a single product/market fit (for whatever
reason).
- There are generally two types of diversification strategies that a management team might
consider:
1. Related Diversification – Where there are potential synergies that can be realized
between the existing business and the new product/market.
a. An example is a producer of leather shoes that decides to produce leather car
seats. There are almost certainly synergies to be had in sourcing raw materials,
although the product itself and the production process will require
considerable investment in R&D and production.
2. Unrelated Diversification – Where it’s unlikely that any real synergies will be
realized between the existing business and the new product/market.
a. Let’s work on the leather shoe producer example again. Consider if
management wanted to reduce its overall reliance on the (highly cyclical)
consumer discretionary high-end shoe business, they might invest heavily in a
consumer packaged goods product in order to diversify.

https://www.business-to-you.com/ansoff-matrix-grow-business/

Explain the advantages and disadvantages of internal growth

Advantages of internal growth
Less risky. Internal Growth is the easiest and
least risky method of growth and evolution for
most businesses. The business is being built
over the years step by step relying on the
strengths of the firm, e.g. its brand reputation,
best-selling products, loyal employees, a few
major customers, etc. The company mainly
concentrates on growing sales of products it
knows very well and which have been proved
to sell well in the past.
Maintains corporate culture. When growing
organically, the business does not integrate
with any other business, therefore the work
culture and management style is maintained.
Internal Growth means there are no problems
related to culture clashes and conflicting
management styles.
higher production means the business can
benefit from economies of scale and lower
average costs
Relatively inexpensive. Lower investment is
often required as growth may be possible
simply from using the existing investments in
capacity. The main source of organic growth
mainly comes from retained profits. There
might also be a need to raise interest-bearing
capital from bank loans or debentures, but
there is much less risk connected with Internal
Growth as the amount of capital required is
relatively lower.
Easier to control and coordinate. It is often
easier to grow internally than to rely on
external businesses. In this way, the firm’s
owners and managers maintain total control of
its business operations without any unknown
Disadvantages of internal growth
there maybe be a long period between
investment and return on investment
growth may be limited and is dependent on the
reliability of sales forecasts
Slow. Internal Growth is slower than External
Growth as it takes time to generate profits and
retain them as cash for future growth of the
business. Hiring employees and developing
new products also takes a considerable amount
of effort and time. On the top of that, growth
may be slow particularly, if the business
operates in saturated, mature or declining
markets.
Divorce between ownership and control. If a
firm grows by changing its legal status, e.g.
from a private limited company to become a
public limited company, then the few original
owners will have to share decision-making
with the new owners. The number of
shareholders will increase. With more owners,
decision-making is prolonged and there is more
likely to be much conflict of interests between
those different shareholders. In addition, there
will most likely be a divorce between
ownership hold by the shareholders and control
of the business which lies in the hands of The
Board of Directors.
A need to restructure. Although sole traders or
partners in the partnership can control and
coordinate daily tasks quite easily, if they grow
their businesses into a large-size firm, then the
organizational structure has to be changed. A
factors that would need to be considered after private limited company or even a public
merging with, acquiring or taking over another limited company will be created. But,
business. restructuring the business organization requires
time, expertise, effort and money. It may
require training and updating of skills of the
current management, or even specialist
managers will have to be hired as the firm and
its workforce grows over time.
Ensures continuity. Business continuity brings Diseconomies of scale. Higher unit costs of
the benefit of consistent productivity of the production arise as the businesses increase in
entire team of workers following company’s size a lot. With more managers and workers
pre-established policies. Everyone in the employed, hierarchical structures will need to
business is consistently on the same page be established. These will most likely cause
working together to offer the same quality of communication problems resulting from longer
goods and services on regular basis to chains of command and slower decision-
customers. Only then people can become loyal making due to increased bureaucracy as the
customers as they experience little or no business grows resulting in internal
change in whatever products they buy. diseconomies of scale in the end.
Maintains healthy gearing position. Internal Reluctant to explore new things. The business
growth is often funded from equity – either may become over reliant on its current sales
retained profits generated in previous years or revenue and profits generated from a small
issuing shares to investors. These two methods number of familiar markets, well-established
do not have any negative effect on the products and loyal customers it knows very
company’s cash flow position. The capital does well. This will cause neglecting all range of
not need to be repaid as there is no external possibilities that may be ventured into with
debt, neither there is any interest on top of the External Growth, such as entering into new
repayments. This provides financial stability markets or doing business in additional sectors
and solvency of the firm. of the economy.

1.5.2b: External growth (inorganic growth)

Describe external growth.

External growth focuses on the areas you don't have direct control over, including capturing new
customers. Generally, this means acquiring another business, merging with another competitor,
or looking at strategic alliances and partnerships to achieve your overall growth goals.

List external growth methods

(i) Mergers and Acquisitions (M&A)

(ii) Takeovers
(iii) Joint Ventures
(iv) Strategic Alliances
(v) Franchising

Explain the advantages and disadvantages of external growth

Advantages of external growth Disadvantages of external growth

Much faster than Internal Growth. External
Growth is a faster way to grow and evolve than
Internal Growth. Buying the entire business
enables for very fast expansion into new
markets, industries and countries.
Achieving economies of scale. Reduction in
costs results from the benefits of internal
economies of scale. By integrating with
another firm, the combined business is able to
spread the costs of many activities such as
purchasing raw materials or advertising, thus
reducing the unit cost of producing one
product. In addition, the combined expertise of
two companies may enhance the design,
features and quality of the product.
Quick way to eliminate competition. The
company can eliminate a competitor quickly
either in a friendly way (in case of mergers and
acquisitions), or in a hostile way (in case of a
takeover). However, such strategies can be
prohibited by the national government because
the lack of competition might not be in the best
interest of the general public
Very expensive. External Growth involves
much higher cost than what is needed for
Internal Growth, especially when it comes to
acquisitions and hostile takeover bids.
Loss of control and ownership. External
Growth can surely lead to a loss of control and
ownership of the business. It is because
takeovers are hostile business integrations in
contrast to friendly acquisitions. When a
company buys enough shares (more than 50%)
in another target firm, it becomes the
controlling owner of it. The new Board of
Directors (BOD) will need to be restructured
which may include managers who were not
originally appointed by the owners.
Culture clashes. When growing inorganically,
the business integrates with other businesses,
therefore the previous work culture and past
management styles cannot be maintained. The
newly formed organization that will emerge,
after the business integration, will have its new
and unique corporate culture built upon the
previous two corporate cultures. All of the
current employees will need to adapt quickly to

Gaining greater marker share immediately.
External Growth gives the business an
opportunity to increase market share fast as the
business gains immediate access to all
customers of the target company at once.
Horizontal mergers, acquisitions and takeovers
do not represent growth in the industry, but a
larger market share leading to greater market
power and dominance in the industry for the
amalgamated business.
Acquiring know-how. Merging can be a very
good way to access new technology,
innovative products, patents or trademarks
without wasting precious time on researching
and developing them which may take many
years. Working with other businesses in the
same, or similar industry, means sharing of
ideas, generating new skills and experiences.
Spreading risks. External Growth can help a
firm to spread risks across several markets,
industries and countries as partners share both
risks and rewards in a Joint Venture (JV) or
Strategic Alliance (SA). Hence, such firms can
benefit from risk-bearing economies of scale.
Easier to obtain finance. Finance is necessary
for business growth. Larger businesses have it
easier because financial institutions are more
likely to consider favorably a request for
finance from a very large business given the
combined value of the assets including cash,
inventory, land or buildings. The large
the desired culture, new methods of working
and the firm’s updated vision statement and
mission statement.
Incompatibility. External Growth means there
will be problems related to conflicting
management styles. Management styles and
corporate cultures might be so different that the
two teams do not blend well together. The
business managers may have different styles of
leadership that makes decision-making
difficult. It will be especially visible during
routine business activities such as business
meetings, business presentations or during the
production process.
Stakeholder conflicts. There might also be
conflict between the two teams of managers
who are used to working with different
practices and systems in the past. The cultures
may be quite difficult to match up, and conflict
of cultures and business ethics will emerge.
Higher Gearing Ratio. Large amounts of long-
term debt mean deteriorating gearing position.
Businesses growing externally are at risk of
having unhealthy gearing position as external
debt is used to fund expansion. Higher debt
will have negative effect on the company’s
cash flow position, if a debt-to-equity ratio
reaches over 50%. The borrowed capital needs
to be repaid with interest on the top of the
repayments. This may result in financial
instability and insolvency of the firm. In the
long-term, business integrations that rely on
bringing huge external finance may suffer
negative impacts on profitability.
Regulatory problems. The government and
certain market watchdogs may be concerned
with, and hence prevent a merger, acquisition
or takeover from happening. Especially, if it
may lead to a monopolistic position giving the
amalgamated business too much market power.
business may simply be charged with a lower
interest rate because of the extra security of
having the real tangible assets as collateral.

Business growth

How can the size of a business be measured? (AO2)

The size debate” what the appropriate size for a business? (AO3)

What are some of the benefits of being a large business?

Why do some businesses stay small?

What 5 factors influence the size decisions of a business?

Types of external growth

(vi) Mergers and Acquisitions (M&A)

a. The term mergers and acquisitions (M&A) refers to the consolidation of
companies or their major business assets through financial transactions between
companies. A company may purchase and absorb another company outright,
merge with it to create a new company, acquire some or all of its major assets,
make a tender offer for its stock, or stage a hostile takeover. All are M&A
activities.
(vii) Takeovers
a. A takeover occurs when an acquiring company successfully closes on a bid to
assume control of or acquire a target company. Takeovers are typically initiated
by a larger company seeking to take over a smaller one. Takeovers can be
welcome and friendly, or they may be unwelcome and hostile.
(viii) Joint Ventures
a. A joint venture (JV) is a business arrangement in which two or more parties agree
to pool their resources for the purpose of accomplishing a specific task. This task
can be a new project or any other business activity.
 b. Each of the participants in a JV is responsible for profits, losses, and costs
associated with it. However, the venture is its own entity, separate from the
participants’ other business interests.
(ix) Strategic Alliances
a. A strategic alliance is an arrangement between two companies that have decided
to share resources to undertake a specific, mutually beneficial project. A strategic
alliance agreement could help a company develop a more effective process.
(x) Franchising
a. A franchise (or franchising) is a method of distributing products or services
involving a franchisor, who establishes the brand's trademark or trade name and a
business system, and a franchisee, who pays a royalty and often an initial fee for
the right to do business under the franchisor's name and system.

(a) Mergers and acquisitions

Distinguish between a merger and an acquisition.
- A merger occurs when two separate entities combine forces to create a new, joint
organization. Meanwhile, an acquisition refers to the takeover of one entity by another.
Mergers and acquisitions may be completed to expand a company’s reach or gain market
share in an attempt to create shareholder value.
- The primary difference between mergers and acquisitions is that a merger is the
combining of two organizations into an entirely new entity, while an acquisition is when
a company absorbs another, but no new organization is created.

RWEs of M&A

CNBC: Spirit shareholders approve takeover by JetBlue after long battle for discount airline.
https://www.cnbc.com/2022/10/19/spirit-jetblue-takeover-wins-shareholder-approval.html

CNBC: Frontier and Spirit to merge, creating fifth-largest airline in U.S. in $6.6 billion deal.
https://www.cnbc.com/2022/02/07/frontier-and-spirit-to-merge-creating-5th-largest-airline-in-us.html

https://www.bbc.com/news/business-50541004

https://www.bbc.com/news/business-50549048

Ericsson to buy Vonage for $6.2 billion - CNN

Describe the following types of M&As:

(i) Horizontal integration- Horizontal integration is the acquisition of a business
operating at the same level of the value chain in the same industry—that is, they
make or offer similar goods or services.

RWEs: Two of the largest supermarkets in America are merging

https://www.cnn.com/2022/10/14/business/kroger-albertsons-merger/index.html

http://money.cnn.com/2015/10/13/investing/ab-inbev-sabmiller-beer-merger/index.html?
iid=surge-stack-intl

(ii) Vertical integration- Vertical integration is a corporate strategy that involves

growth through streamlining operations. This occurs when one company acquires
a producer, vendor, supplier, distributor, or other related company within the
same industry.
a. Backward integration is a form of vertical integration in which a company
expands its role to fulfill tasks formerly completed by businesses up the
supply chain. In other words, backward integration is when a company buys
another company that supplies the products or services needed for production.
b. Forward integration is a business strategy that involves a form of downstream
vertical integration whereby the company owns and controls business
activities that are ahead in the value chain of its industry, this might include
among others direct distribution or supply of the company's products.
c. A vertical merger integration can integrate backward or forward: Backward
integration involves merging with upstream companies (such as suppliers and
producers). Forward integration involves merging with downstream
companies (such as distributors or retailers).

(iii) Lateral integration- the action of merging two companies that deal in the sale of
similar goods within one market branch.
a. Lateral integration is the expansion of a corporation to include other
previously competitive enterprises within the same sector of goods or service
production. For example, Lateral or Horizontal integration takes place when
one candy maker takes over another candy maker.

(iv) Conglomerate integration- "any merger that is not horizontal or vertical; in

general, it is the combination of firms in different industries or firms operating in
different geographic areas". A conglomerate merger is a merger between firms
that are involved in totally unrelated business activities. These mergers typically
 occur between firms within different industries or firms located in different
geographical locations.

4 Biggest Merger and Acquisition Disasters (investopedia.com)

 (b) Takeovers

Define the term takeover.

A takeover occurs when an acquiring company successfully closes on a bid to assume control
of or acquire a target company. Takeovers are typically initiated by a larger company seeking
to take over a smaller one. Takeovers can be welcome and friendly, or they may unwelcome
and hostile.

https://www.tutor2u.net/business/reference/takeovers
RWEs of takeovers

JetBlue launches hostile takeover for Spirit

https://www.cnn.com/2022/05/16/investing/jetblue-spirit-takeover/index.html

Just Eat rejects hostile £5bn takeover from South Africa’s Naspers

https://finance.yahoo.com/news/south-africas-naspers-makes-hostile-5-bn-bid-for-just-eat-094619231.html?
soc_src=community&soc_trk=ma

Xerox trade deal: Xerox considers $27-billion takeover offer for HP

https://m.economictimes.com/news/international/business/xerox-considers-takeover-offer-for-hp-for-27-billion/
articleshow/71933870.cms

(c) Joint ventures (JVs)

A joint venture (JV) is a separate business entity created by two or more parties, involving
shared ownership, returns and risks

Sony and Honda are starting a new company to make electric vehicles

https://www.cnn.com/2022/03/04/business/sony-honda-new-ev-company-intl-hnk/index.html

Explain the benefits and risks of JVs.

Joint Ventures | Business | tutor2u

http://asia.nikkei.com/Business/Companies/VW-leans-heavily-on-China-in-wake-of-emissions-
scandal
 (d) Strategic alliances (SAs)

(227) Strategic Alliances - YouTube

Strategic alliances are business to business partnerships in which two or more companies work
together to achieve objectives that are mutually beneficial. Companies may share resources,
information, capabilities and risks to achieve this.

While companies have used acquisition to accomplish some of these goals in the past, forming a
strategic alliance is more cost-effective.
Key stages to the formation of a Strategic Alliance

Examples of successful strategic alliances

GAME OVER! Elon Musk & Google's INSANE Partnership Will Change EVERYTHING 🔥🔥🔥 - YouTube

Pfizer and BioNTech Announce Further Details on Collaboration to Accelerate Global COVID-19 Vaccine
Development | Pfizer

BioNTech profile: Firm working with Pfizer for COVID-19 vaccine (yahoo.com)

https://www.allbound.com/blog/successful-strategic-alliances-5-examples-of-companies-doing-it-right

http://smallbusiness.chron.com/examples-successful-strategic-alliances-13859.html

https://www.google.com.hk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=airline+alliances+list

Photos Show Yacht Design Inside a Boeing 737 MAX Private Aircraft (businessinsider.com)

Delta Launches New Facial Recognition Technology for Security Lines With TSA | Travel + Leisure
(travelandleisure.com)

Discuss the advantages and disadvantages of strategic alliances.

Advantages and Disadvantages of Strategic Alliance (universalteacher.com)

Alliances - benefits of scale without the risks? | Business | tutor2u

(e) Franchising
https://www.youtube.com/watch?v=EmjA6O2HIus

Describe and give examples of a franchise

Franchising arises when a franchisor grants a license (franchise) to another business

(franchisee) to allow it trade using the brand / business format.

The franchisor is the business whose sells the right to another business to operate a franchise –
they may run a number of their own businesses, but also may want to let others run the business
in other parts of the country.
A franchise is bought by the franchisee. Once they have purchased the franchise, they have to
pay a proportion of their profits to the franchisor on a regular basis. Depending on the business
involved, the franchiser may provide training, management expertise and national marketing
campaigns. They may also supply the raw materials and equipment.
Identify potential benefits and problems with franchise arrangements
Advantages and disadvantages of franchising | nibusinessinfo.co.uk

Quiz on external growth

https://www.tutor2u.net/business/reference/external-growth-methods-revision-quiz

Further reading on growth

Internal and External Growth Strategies EXPLAINED with EXAMPLES | B2U (business-to-you.com)

Growth and evolution and the concepts