The growth of a business is either internal or external. Internal growth occurs when a business expands its existing operations, however external growth is when a business takes over or merges with another business. An example of internal growth would of a fast food restaurant, which would expand itself by opening another branch in another part of the city or country. External growth is divided in three different ways of expansion; horizontal integration, vertical integration( forward and backward) and conglomerate integration.
Horizontal integration is when one firm merges with or takes over another firm in the same industry at the same level of production, e.g when a textile mill takes over or merges with another textile mill. This type of integration is beneficial to the firm because it creates more opportunities for economies of scale. It also reduces competition, and it has a bigger share of the total market.
Vertical integration is when one firm merges or takes over another firm of the same industry but at a different stage of production. This type of integration is divided into forward vertical integration and backward vertical integration. Forward vertical integration is when a firm merges or takes over a firm in the same industry which is at a later stage of the production i.e closer to the consumer. Forward vertical integration benefits a business as it assures an outlet for the product. Also, the profit margin of the retailer increases. Backward vertical integration is when a firm merges or takes over a firm in the same industry which is at an earlier stage of production i.e closer to primary production. This merger or take over assures the supply of raw materials or important components. It also increases the profit margin of the supplier. It may also prevent the supplier from supplying other manufacturers. It can also control the cost of supplies for the manufacturer.
Another way of integration or growth is, conglomerate integration. It is when one firm takes over or merges with a completely different industry. It is also known as diversification. This is a very expensive form of expansion, as it has more activities. However, there might be a transfer of ideas between the two industries in some certain fields, allowing more room for vast ideas.
