Growth in companies (integration)

Article explaining motives for growth and expansion of growth mainly via integration of companies.

Firms all have 5 main different motives for growth, these include:

1. Profit motive: Grow to achieve higher profits to benefit incomes (possibly increase standard of living).
2. Cost motive: Increase in economies of scale means that there is a reduction cost which in turn increases profit.
3. Market Power motive: May wish to increase market dominance which in turn increases profit in long run.
4. Risk motive: Viewing other markets and taking a risk in order to seek a reward, in most cases it is profit.
5. Managerial motives: Behavioral strategies to either benefit the company’s profit or benefit themselves.

They all come back to the main motive of profit. You could argue that there are other motives such as becoming a legacy, having the largest positive impact on other people’s lives or fame, but the general view is that companies expand due to profit. In order for companies to expand they have a selection ways to grow.

First of all there is organic (internal) growth, these consist of:

• Expansion of existing production capacity via new technology.
• Developing and launch of new products.
• Growing a customer base through marketing (global branding).

But today I am focusing more on inorganic (external) growth which consists of mergers and takeovers.

Mergers are when two firms join by agreement.

Takeovers are when a company buys a set amount of shares of another company listed in the stock exchange (usually over 50%). These can be friendly takeovers, in which the board of directors recommends the offer to be accepted by the shareholders. However they can turn hostile, and the management and share holders can refuse a takeover, creating a difficult situation for the bidder.

Both takeovers and mergers are forms of integration, to complicate it more there are also different forms of integation (This isn’t even maths!)

Horizontal Integration

When the products are complementary or competitive to one another then companies can merge to monopolise more of the market share.

Examples include — Nike and Umbro — NTL and Telewest (Virgin media).

Advantages:

• Increases share of market.
• Increase in economies of scale, reduction in costs and therefore improved profits and competitiveness.
• One large firm may need fewer workers and therefore process of rationalization (cutting jobs) achieve cost savings.
• Mergers often justified by existence of synergies (1+1 =3).
• Increase range of products (diversification).
• Opportunities for economies of scope, which is the lowering of average cost by producing two or more products.

Vertical Integration

Advantages:

• Greater control of supply chain – reduction in costs and greater output.
• Improved access to raw materials.
• Greater control over retail distribution channels.
• Economies of scale in long term.

Vertical backward integration

When a company purchases a supplier company. So they can control the price and either damage competitive companies or increase revenue in the long run due to economies of scale + diversification.

Examples include – Glaxosmithkleine which was from a service sector business and outsourced into the manufacturing sector.

Vertical forward integration

When a company purchases a consumer company. So they can influence who they supply the products to to increase production and get more of a share of the general market.

Examples – Glencore which is a mining company but it has expanded into the manufacturing sector.

Lateral (conglomerate) Integration

Companies joining together which have similar properties but are not competitors due to different markets.

Examples include — Microsoft and Skype — Google and Youtube — Richard Branson with Virgin.

Advantages:

• Economies of scale.
• Increases capital of companies for possible investment in other companies.
• Greater spread of risk.

In conclusion companies grow mainly for the profit motive and they do this by organic or inorganic growth. These different ways in which to grow give the firm a choice of how to maximise their revenue and deflate costs. As you can see mergers is one of the best ways as it contains numerous advantages including monopolising the market, reducing long run costs and increasing output.