How do businesses grow?

How do firms usually expand their size? 

There are two primary ways through which firms may expand their size: organic growth and external growth, which is achieved through mergers or takeovers. Organic growth entails expanding the firm's scale through internal financial resources, such as investments in capital equipment or workforce expansion. Conversely, external growth involves the combination of two or more firms under the same ownership. A notable instance of external growth occurred in 2005 when Google acquired Android Inc. This strategic move was aimed at gaining control over the Android mobile operating system, capitalizing on the expanding smartphone market. Through this acquisition, Google not only expanded its technological capabilities but also strengthened its market position in the rapidly evolving mobile industry. In addition, while organic growth relies on internal development and investment, external growth strategies like mergers and takeovers offer firms the opportunity to enhance their market presence and competitive edge through common incorporation.

Types of mergers

Economists have identified three types of mergers:

• Horizontal Integration - This is a merger between two firms in the same industry at the same stage of production.

• Vertical Integration - This is a merger between two firms in the same industry that are at different stages of production. Vertical integration involves two types: Forward vertical integration and backward vertical integration. 

• Forward vertical Integration: when a supplier merges with one of its purchasers.

• Backward vertical Integration: when a purchaser merges with one of its suppliers

• Conglomerate Integration - This is a merging of two firms that are in different industries with different stages of production. 

Benefits and Drawbacks of Each Type of Merger 

Horizontal Integration:

When companies of the same industry come together, they pool their resources and gain market share, thus often dominating the market. This kind of consolidation brings about a reduction in the number of competitors and normally results in the cost per unit being reduced by economies of scale. Now, with fewer competitors, there will be more industrial knowledge available with the merged entity; hence, the merger may be successful.

However, mergers may also create problems. For instance, there could be overlapping management positions after the merger that will raise average costs and result in inefficiency. Besides, the corporate culture conflicts of the two companies in the merger may also bring new problems.

Vertical Integration:

Vertical integration takes place when a firm merges with either one of its suppliers or purchasers. The more significant level of control that they achieve allows them to enjoy superior supplies of raw materials and the likelihood of their enhancement in quality. Moreover, companies can get hold of extra revenues through forward integration by integrating the stages of production and enhancing brand visibility. However, there are also some latent disadvantages to the strategy. For example, vertical integration could result in diseconomies of scale, where there can be pointless duplications of managerial personnel, increasing costs. There may be cultural issues between the two companies merged, which would hamper teamwork and thus efficiency. Further, there may be a lack of skills in managing the integrated firm, particularly if neither of the firms has previous experience managing combined operations. Moreover, it may take a long time to recover the amount invested in purchasing the new company.

Conglomerate Integration:

When two companies dealing in different industries with different stages of production come together, it can lower the overall business failure risk. This type of merger usually increases the size of the new company and extends its links into new industries, which provides grounds for growth. In addition, the duplicated parts of the business in the conglomerate can be sold to generate profit. Growth through mergers does, however, present some challenges. An example is the loss of expertise in products or even industries of the merged firm, hence affecting operational efficiency. The mergers could result in rapid growth, which may bring about diseconomies of scale, whereby an organization becomes too large to be managed effectively, hence increasing costs. Besides, there could be resentment from employees from the acquired firm about the takeover, hence resulting in a loss of productivity.

Conclusion

Mergers and takeovers can be ways of making a company grow in the market. The process may also be rated with many problems. For instance, a hostile takeover is a case whereby one company acquires the shares of another firm in a manner that the acquired company does not desire; this may cause strained relationships and in turn, affect the running of such firms. Besides, failure to realize synergies between the merging firms may undermine the very reasons for entering into such a merger, leading to financial losses and operational inefficiencies. Further, businesses that rely solely on internal sources of finance for expansion may face limitations to the access of added capital for initiatives of growth. This can lower their chances of taking up market opportunities and competing favorably with opponents who are better equipped in terms of funds. Whether it is a horizontal, vertical, or conglomerate merger, success requires long-term planning. Any company undertaking a merger will have to exactly calculate the expected synergies, challenges of cultural integration, and market dynamics to have a strategic and operational fit after the merger. Apart from that, the ability to rapidly respond to changes in market structure and consumer demand is an indispensable condition for withstanding competitors and achieving goals of growth.