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How does a firm grow?

Updated: Jul 2, 2023

Businesses can grow internally or externally. Growing internally will involve business expansion by expanding its operation such as increasing output or opening new shops/outlet to provide more services to more customers. This will enable the business to acquire more market share.


External growth can be achieved by horizontal integration, vertical integration and lateral integration, which involves mergers and acquisition (takeover).


Horizontal integration are when a business buys over its competitors. This is will increase the market share collectively and enable economies of scale to lower the average cost.


Vertical integration involves buying your supplier (backward integration) or distributor (forward integration).


A lateral integration involves taking over a business that is not within the same industrial sector that will make the firm a conglomerate. This is a common diversification strategy to mitigate risk, and ensure that the firm will not make a loss should one business fail.


In order for a firm to grow internally or externally, more capital will be required. They can be sourced internally or externally as well.


RELATED CONCEPT

  1. Diversification

  2. Specialization


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PAST YEAR QUESTIONS

  1. Identify and explain two possible reasons why a firm has grown quickly. (4 marks) Oct/Nov 2019/11

  2. Do you think Anna and James should move to a larger shop? Justify your answer. (6 marks) Feb/Mar 2019/12

  3. Do you think a takeover of a competitor is the best way for a large business to grow? Justify your answer. (6 marks) Feb/Mar 2021/12

  4. Outline one advantage and one disadvantage to KTF of taking over the other business. (4 marks) Oct/Nov 2020/11

  5. Do you think entering a growing market where there is a lot of competition is the best way for a business to expand? Justify your answer. (6 marks) Oct/Nov 2020/12

  6. Explain two advantages to EQR of selling franchises as a way to grow its business. (6 marks) Oct/Nov 2022/12

  7. Do you think FGH should take over the other business? Justify your answer. (6 marks) May/June 2019/11

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