Why Owners Want to Expand a Business
Benefits of Expansion
Higher profits A larger business can sell more and earn more.
More status and prestige Owners and managers gain reputation, and bigger firms often pay higher salaries to managers.
Lower average costs (Economies of scale)As the business grows, the cost per unit usually falls.
Larger market share The business controls a bigger part of the market:
More power with suppliers and distributors
Consumers trust well-known, large businesses
Ways Businesses Can Grow
1. Internal Growth (Organic Growth)
Expansion using the business’s own resources. Example: A restaurant owner opening new branches in other towns.
Usually slower but safer and easier to manage.
2. External Growth
Growth that happens when a business merges with or takes over another business.
Types of External Growth
A) Horizontal Merger (Horizontal Integration)
When two firms in the same industry and at the same stage of production join together. Example: Two clothing stores merging.
B) Vertical Merger (Vertical Integration)
When two firms in the same industry but at different stages of production join together.
There are two types:
1. Forward Vertical Integration
Joining with a firm at a later stage, closer to the consumer. Example: A manufacturer buying a retail shop.
2. Backward Vertical Integration
Joining with a firm at an earlier stage, closer to raw materials. Example: A bakery buying a flour mill.