Advantages of External Expansion
Business: Cambridge International GCSE (2027 Exams), topic 1.3.17
Advantages of External Expansion
External expansion is growth achieved by acquiring another business. Mergers happen when 2 firms combine to make 1 large company (e.g. Disney and Pixar in 2006). In takeovers, 1 firm buys a controlling stake (50%+) of another firm (e.g. Virgin Active and Esporta in 2011). Advantages of external expansion are:
Rapid expansion
- The key benefit of external expansion is the speed with which firms can expand.
- For example, in 2014 Facebook bought WhatsApp for $19 billion. This is a large amount of money but it instantly gave Facebook 700 million customers.
Reduce competition
- A firm can merge with or take over a competitor.
- This can reduce the amount of competition that a business faces. It can also increase market share and let the company benefit from economies of scale.
- For example, in 2004, the Morrisons supermarket company took over Safeways supermarkets. This increased the number of Morrisons stores to over 500 from 120. Morrisons’ market share rose from 6.4% to almost 15%.
Diversify (spread) risk
- A firm can merge or take over a firm in a different industry. This makes the company less reliant on its existing products/services and can diversify (or spread) a company’s risk.
- For example, in 2011, Microsoft (an operating system company) bought Skype (a video calling company).
Types of integration
- Horizontal integration:
- This occurs when a firm merges with or takes over another firm in the same industry at the same stage of production.
- It increases market share and reduces competition.
- Vertical integration:
- This happens when a firm merges with or takes over a business in the same industry but at a different stage of production.
- It can secure supply chains (backward integration) or control distribution (forward integration).
Test yourself on Advantages of External Expansion
What is a merger?
What are some advantages of external expansion?