Revision: Business Growth Tutor2u 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 Demand and Scale Economies Profit at P1 Price and cost P1 LRMC AC1 LRAC AR1 MR1 Q1 Output Demand and Scale Economies Profit at P1 Price and cost Profit at P2 P2 P1 LRMC AC1 AC2 LRAC AR2 AR1 MR2 MR1 Q1 Q2 Output 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 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) Types of business integration Horizontal Vertical Lateral Conglomerate 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? Vertical Integration Vertical Integration involves the joining together of firms at DIFFERENT STAGES of production. Examples: Brewing Holiday companies Oil industry 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. 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.