1. Revision: Business Growth
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2. Motivations for business growth
Profits and shareholder value
Dividend income
Capital gains from rising share prices
Financing business expansion
Market share / market power
Monopoly power
Pricing power
Economies of scale
Falling long run average cost
Higher profit margins
Managerial motives
Managerial satisfaction / status

3. Demand and Scale Economies
Profit at P1
Price and cost P1
LRMC
AC1
LRAC
AR1
MR1 Q1
Output

4. Demand and Scale Economies
Profit at P1
Profit at P2
Price and cost P2 P1
LRMC
AC1
AC2
LRAC
AR2
AR1
MR1
MR2 Q1 Q2
Output

5. How do small firms become large?
Internal growth
When the company increases in size on its own
Through increased demand
Expanding range (scope) of products
Selling products in a number of locations
Investment in capital and labour inputs
Joint ventures

6. How do small firms become large?
External growth – the integration of two or more businesses - includes
Merger (where 2 companies combine to become one new company)
Takeover (where one company wants to buy another company and make it part of its existing business)

7. Types of business integration
Horizontal
Vertical
Lateral
Conglomerate

8. Horizontal integration
Horizontal Integration is when one company merges/takes over another company which produces SIMILAR PRODUCTS and which is involved at the SAME STAGE of production.
Examples:
Adidas & Reebok
Airline mergers on the way?

9. Vertical Integration
Vertical Integration involves the joining together of firms at DIFFERENT STAGES of production.
Examples:
Brewing
Holiday companies
Oil industry

10. Lateral Integration
Lateral Integration is a merger between two business which produce SIMILAR products.
Example: A book publisher might acquire a magazine/newspaper publisher, or even television and other media products.

11. Conglomerate integration (business diversification)
A conglomerate merger takes place when one company merges with/takes over another which is in a completely different industry.
Conglomerate mergers spread the risks more because the firm no longer relies upon sales of only one type of product.