Types of External Growth (AQA A Level Business): Revision Note

Types of integration

• External growth usually takes place when firms join in one of three broad ways

1. Vertical integration

• This is a merger or takeover of another firm in the supply chain or different stage of the production process

  • E.g. An ice cream manufacturer merges with a dairy farm or an ice cream cafe chain

Examples of vertical integration

• Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain

  • E.g. A dairy farmer merges with an ice cream manufacturer

• Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain

  • E.g. An ice cream retailer takes over an ice cream manufacturer

Evaluating vertical integration

2. Horizontal integration

• This is a merger or takeover of a firm at the same stage of the production process

  • E.g. An ice cream manufacturer buys another ice cream manufacturer

Evaluating horizontal integration

3. Conglomerate integration

• This is a merger or takeover between firms in entirely different industries

  • E.g. An ice cream manufacturer buys a clothing company

Evaluating conglomerate integration

Mergers

• A merger occurs when two or more companies combine to form a new company

  • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity

• Firms merge to become stronger together than they would be apart

  • That strength comes from lower costs, more customers, new capabilities or less competition

Examples of recent UK mergers

Merger	Explanation
	Both companies said the cost of rolling out 5G was too big for them to handle alone By joining forces they can pool their money to pay for new 5G masts and fibre cables save £700 million a year by sharing towers, shops and support staff instead of running two separate networks become a strong brand that can compete on price and coverage with the two bigger rivals, BT’s EE and Virgin Media O2
	Virgin Media had the fastest home broadband, while O2 had one of the biggest mobile networks Putting them together allows the new firm to sell bundles that give customers fast home internet and mobile service on one bill share the cost of upgrades to cables and 5G over several years Increase profit by £540 million a year within five years by using the same call centres, shops and marketing

Takeovers

• A takeover occurs when one company purchases another company, often against its will

  • The acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations

Reasons for mergers and takeovers

Common issues with takeovers

• Mergers and takeovers can look attractive, but business leaders must also plan for culture clashes, higher debt and the real possibility that regulators will refuse the merger

1. Hard-to-blend cultures and systems

   • When two very different organisations join together, employees may clash over ways of working and IT systems may be incompatible

   • Managers can spend months fixing problems instead of improving products

   • Expected cost savings and new ideas can stall, leading to poorer performance and lower staff morale

   • E.g. Kraft Foods and Heinz's merger in 2015 led to significant cost-cutting which left some brands under-funded and less able to compete

2. Heavier debt burden

   • Mergers are often paid for with borrowed money

   • High interest payments use cash that could alternatively fund research, marketing or new factories

   • If profits fall, the enlarged business may be forced to cut dividends, sell assets or issue new shares

   • E.g. Dell borrowed $48 billion in 2016 to finance its purchase of rival EMC, which affected cash flow for years and was a key reason Dell had to raise finance by selling shares on the stock market in 2018

3. Regulation

   • Competition watchdogs such as the UK's Competition and Markets Authority (CMA) can delay a merger for years, demand that parts of the business be sold off, or block the deal entirely if they think it will hurt consumers

   • Companies can spend years and millions of pounds on planning a merger that is never approved

   • The CMA stopped the planned £12 bn merger of Sainsburys and Asda in 2019, saying it would push up prices for groceries and fuel and limit competition

Joint ventures

• A joint venture is when two businesses join together to share their knowledge, resources and skills to form a separate business entity for a limited period of time

  • E.g. The mobile network EE is a joint venture formed by the French mobile network, Orange and the German mobile network, T-Mobile

Reasons for joint ventures

Problems with joint ventures

• Conflicting objectives

  • If the parent companies want different things, everyday decisions slow down and the joint venture can lose focus

    • E.g. In 2024 ITV sold its 50% stake in Britbox to the BBC, saying the service would be simpler to run under one owner after the partners’ strategies began to diverge

• Too small to compete

  • A joint venture that stays small may not have the money, stores or marketing power needed to stand up to larger rivals, so it struggles to grow

    • E.g. In 2016, Sainsburys and Dansk Supermarked's joint venture Netto ended because nationwide expansion would have required more investment than they were prepared to spend

• Limited control for a minority partner

  • A parent that owns only a small share may have little say in its strategy

    • E.g. Tesco ended its minority stake in its Chinese grocery joint venture in 2020, drawing a line under years of weak performance

Franchising

• Franchising is a business model where an individual (franchisee) buys the rights to operate a business model, branding, and support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees

• The franchisee operates the business under the franchisor's established system and receives training, marketing support, and ongoing assistance

Examples of fast food franchises 

Evalauating franchise growth