• By investing in more capital goods by borrowing more money, raising more funds from owners or by keeping some of the profit back in business.

• Through INTEGRATION -when one firm combines with another business.
• This can happen in any two ways:
• By a merger-a friendly deal where two businesses join together (each business owns a share of the other business for mutual benefit or,
• By a takeover-a forced and sometimes hostile deal where one firm buys a share of the other business.

• HORIZONTAL integration. This occurs when firms in the same industry and at the same stage of the production process combine to form a larger business.
• For example: a merger between two banks - Westpac and Trustbank
=WestpacTrust

• It reduces competition, thus increases market share
• Increase in market power
• It has greater control on prices to make more profit
• Gain new ideas from the other business
• As its scale of operations is greater, it may experience economies of scale (decrease in average costs=efficient use of resources=more profit
• The new business may not need all of the workers.
They could remove some workers to become efficient and make more profit

For Firms
• The businesses may have different objectives and targets
• It costs a lot of money to merge with or takeover another business
• Communication problems
For Consumers
• They may have to pay higher prices due to lack of competition
• Less choice

• This occurs when a firm expands by combining with an existing business in the same industry but at a different stage of the production process .
• This can be Backward or Forward

• Forward Vertical Integration - where a firm buys into another in a later stage of production.
• For example, a group of farmers buys the local milk processing plant.

• Backward Vertical Integration where a firm buys into another firm in an earlier stage of production. For example, when KFC (takeaways) buys the country
’ s biggest poultry processing plant.

• Forward integration involves integrating with customer firms to ensure retail outlets for products.
Frank Allen
Tyres
Dunlop
• Backward integration involves integrating with a
“input” supplier to reduce supply costs (or guarantee their quality).
Rubber plantation

• It has the advantage of cutting costs by reducing the profits, or reducing costs made at different stages of production.
• It also controls the quality and delivery of materials right through the production process.
•
• Increase entry barriers to potential competitors
• Increased control of the market.
• Better able to deal with any periods of shortage.

• Increase in costs e.g. May need to appoint staff to run the business
• Inexperience in the field could prove costly
• Possible diseconomies of scale that may arise in terms of administration
• Decreased ability to increase product variety

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Firms can also expand by diversification.
This involves take over or merger with another firm in an unrelated industry.
When a firm increases the range of businesses it is involved in, it may develop into an industrial combine, or conglomerate.
For example: Mitsubishi

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Firms diversify for a number of reasons:
 to spread their risks. When sales in one
 industry are depressed, other industries provide more buoyant sales to obtain other revenue sources, (so that it is not dependent on one market).
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To increase the range of products they make or sell.
To develop into a conglomerate.
Take advantage of existing expertise, knowledge and resources in a company.

• A market gardener whose property is next to a McDonalds car park. The market gardener turns part of his property into a mini-golf course to make additional income from the crowds who stop for takeaways.

• May result in the slowing growth of its core business.
• Adding management costs.
• Losses may incurred during the market consolidation process.
• Complex dealings with the legal requirements of different countries.