Forms of growth

There are two broad methods of obtaining growth.

(a) Organic growth, which is growth through a gradual build-up of the firm's own resources:
developing new products, acquiring more plant and machinery, hiring extra labour and so on.
Organic growth is often a slow but steady process.
(b) Growth through mergers and acquisitions, which is the combination of two or more firms
into one. An acquisition is often a hostile form of takeover, in which one business acquires
ownership of another without the agreement or full approval of the target firm's directors.

A merger is usually a mutual agreement, where the two firms agree to form a new company.
The nature of a merger or acquisition can be categorised according to which firms are coming
together: are they in exactly the same line of business? Are they in very similar businesses? Are
they in related businesses, but operating in different stages of the production and selling process?
Are they in unrelated lines of business?

Horizontal integration. When two firms in the same business merge, there is horizontal
integration. Horizontal integration tends to create monopolies.

Vertical integration. Two firms operating at different stages in the production and selling process
might merge. When they do, vertical integration occurs.
For example a company which operates exclusively in oil refining might take over an oil shipping
company, and perhaps an oil extraction company too. This would be backward vertical
integration, moving back through stages in production towards the raw material
growing/extracting stage. The same company might take over a company with a distribution fleet
of petrol tanker lorries, and perhaps a chain of petrol stations too. This would be forward vertical
integration: integrating forward through stages in production and selling towards the end
consumer sales stage.
Conglomerate diversification. A company might take over or merge with another company in a
completely different business altogether. This form of merger is diversification, and a group of
diversified companies is referred to as a conglomerate organization.

1. List one examples for each of the following.

a. Horizontal integration
b. Vertical integration (backward)
c. Vertical integration (forward)
d. Diversification
2. Identify advantages and disadvantages of horizontal integration, vertical integration and
diversification.