Notes on Microeconomics

Chapter 6-2: Ownership, Expansion and Integration of Firms

1. Ways of expansion

Ways of expansion

Integration Internal expansion

(external expansion)
meaning meaning

A firm enlarges its scale through taking A firm expands within its existing
over or merging with another firm. operation and management structure.
example example

Hong Kong Exchanges and Clearing Opening new branch

Limited acquired London Metal
Exchange Holdings Limited

2. Types of expansion

Types of expansion

Horizontal Vertical Lateral Conglomerate

expansion expansion expansion expansion

Vertical forward expansion Vertical forward expansion

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3. Meaning of different types of expansion
(a) Horizontal expansion
(b) Vertical expansion
(i) Vertical backward expansion
(ii) Vertical forward expansion
(c) Lateral expansion
(d) Conglomerate expansion
Meaning
A firm expands into a business at the same stage of production of
the same product.
A firm expands into a business in a different production stage of the
same product.
A firm expands into a a previous stage of production.
A firm expands into a latter stage of production.
A firm expands into a business of related but not competing
product.
A firm expands into a business of unrelated production.

4. Motives for different types of expansions

4.1 General motives for expansions

(i) To enjoy economies of scale
(ii) To use resources more efficiently (for external expansion)
(iii) To take advantage of brand names and technology.

4.2 Specific motives for different types of expansions

Type of expansion Motive

•To increase market share
•To reduce the number of competitors
Horizontal expansion (external horizontal expansion only)
•To reduce duplication of facilities
(external horizontal expansion only)
Backward
•To ensure a reliable supply of input
expansion
Vertical
Forward •To ensure a market outlet for its products
expansion •To gain access to first-hand information on the market
•To enhance competitiveness by offering related products
•To reduce risk and cost by product diversification
Lateral expansion
•To utilize the brand value by selling other product under the same
brand
•To reduce risk and cost by product diversification
Conglomerate expansion • To utilize the brand value by selling other product under the same
brand