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There are many different methods for firms to grow; organically, through mergers or acquisitions or through joint ventures.

External Growth

Joint Venture

A joint venture is where 2 or more firms work together in an industry to make a profit. This may allow a company access into a certain market and give another company valuable knowledge and resources. One example of a joint venture is when Tesco bought a 50% stake in Hymall supermarkets, a Chinese firm. The deal gives Tesco access to the lucrative Chinese market which is fast expanding ahead of other competition like Carrefour and WalMart. It is easier for Tesco’ to pursue a venture like this rather than try to set itself up in China on its own. This is because it has no market presence there and would have to spend a lot of money building the brand there as well as developing a supply chain. It may have been cheaper for them to purchase Hymall than to do this. Hymall also has the support of the Chinese government as it was initially a Chinese firm and is still 50% controlled by China. The advantages to the venture for Hymall, is that they can use the knowledge that Tesco has from the venture to expand further. It may also allow them to expand abroad and they would presumably make a large profit as Tesco would put a lot of resources into making the venture a success (due to the potential profits). Tesco also has a lot of money capital that Hymall may not have.


Mergers can be between 2 companies that jointly agree to join or if 1 firm attempts to purchase another firm hostilely.

Vertical Forward

A forward vertical merger is when a firm that is lower in the production process purchases a firm that is further on in the process. This ensures that the supplier firm has an outlet to sell its product or service. One example is oil companies purchasing petrol stations, so they aren’t relying on someone else purchasing oil and then selling it on. They can also make more profit from this that if they went through a middle man.

Vertical Backward

A backward vertical merger is when a firm acquires another firm that is lower on in the production process. This is usually done to secure supplies or reduce costs. An example of this is a fast food retailer purchasing one of its supplier firms that make the food. This ensures that the fast food retailer has supplies (as it owns it) and it also won’t have to pay that company a profit and hence can make things more cheaply. It may also increase the barriers to entry for new firms.


Horizontal integration is when 2 firms that are in the same stage of the production process merge to form 1 firm. An example of this is Lloyds (bank) and TSB (bank) which merged to form Lloyds TSB. Usually, the new merged firm benefits from economies of scales and can employ cost-cutting to maximise profits.


Occasionally a firm may decide to demerge and split into different firms. This can be done if it is forced to due to anti-competition laws, or because one firm isn’t making much profit and it would make more sense to split the firm into 2 so they can be managed more efficiently.  Examples of demergers include News Corporation spinning off its TV business from its newspaper division. This is because the TV business is much more lucrative than the newspaper division and as 1 firm the share price is a lot lower than if the TV business were separate. It also ring fences the TV-side from any legal proceedings against the newspaper-division due to hacking allegations. Another example is that of Fosters spinning off its wine division in order to focus on its more profitable beer division. It will make money by selling the wine division and it can use this to invest in the beer division to make a further profit.

A final example is that of Direct Line Group which owns Direct Line, Green Flag and Churchill. DLG is currently a subsidiary of RBS but is in the process of being sold off to comply with EU competition laws.

Internal divestment can occur if the company removes certain products from the market or withdraws from a market or sector.

The selling off of divisions can be profitable; this could then be delivered to shareholders or re-invested into the core business to expand growth.


Growth can also be achieved by buying firms in different sectors. This might be achieved if another sector is doing well and a firm wants to profit from this or perhaps to hedge the firms bets or because a director spots a firm that it can buy cheap. An example of a conglomerate is Unilever which has a diverse portfolio of products (which it has acquired) from washing-up liquid to ice cream producers. Virgin is another example they have their train business and an aviation industry, this is an example of a firm hedging its bets, if people are flying less they may instead be using trains, therefore Virgin profits.

Internal Growth - Organic Growth

Organic growth (internal growth) is based on investing in what the firm currently does. This can be done by expanding the product range; a firm can expand its range by selling products closely related to its main seller. For example a firm that makes and sells motorbikes might expand its range to include helmets and clothing, and may also offer custom design. It can also pursue growth by targeting new markets; this can be achieved by targeting different customers or entering a new country (or even opening more stores in a different town or city). This links in with expanding the distribution network; make the product or service available in more locations. Hence internal growth can be pursued by a firm increasing its output by increased investment or by expanding the labour force.

Organic growth is usually financed with retained earnings, borrowings or a rights issue. Firms usually offer like for like data on their annual report which shows how much organic growth has been pursued.

Reasons for Growth

Profit maximising firms are motivated to grow in size to exploit economies of scale more fully. Horizontal mergers usually provide a lot of savings and the new firm can exploit a lot of economies of scale. A larger firm means it has a greater market share and therefore may be able to exploit its market more with less competition.

Large companies can reduce risk; conglomerates have businesses in a lot of different sectors, therefore in one sector becomes less profitable the firm will still be able to remain in business due to its operations in other sectors. Conglomerates are likely to diversify to buy firms which don’t have a cyclical demand pattern (or one that isn’t too large).

Benefits of Mergers

Avoiding duplication can result in a lot of cost cutting, for example 2 firms may be both employing a large administration force, and if they were to merge they could share the administration force and hence cut jobs and reduce costs; this is known as rationalisation. Although this would result in fewer jobs it may also enable the firm to reduce prices hence benefiting consumers (alternatively the firm may just make larger profits benefiting shareholders).

There are also a variety of economies of scale that can result from a merger (particularly a horizontal merger).

Costs of Mergers

Higher prices may arise if the merged firm faces less competition in the market. This will be at the detriment to consumers. Mergers will also lead to less choice for consumers.

Jobs losses can also arise if the merged firm looks to avoid duplication or if it is taken over by an asset stripping company that removes under-performing sectors of the firm.

The new firm may experience diseconomies of scale, the larger firm may not be able to motivate workers who may feel they are just a cog in a corporate machine and hence productivity may fall.


Globalisation has resulted in firms increasing in sizes since the 1980s with the advent of better transport and communication. In some markets this has led to the growth of giant firms with operations in a host of countries. These firms that conduct business in a variety of different countries are known as multinational corporations.

Page last updated on 20/10/13