7.7.3—External growth and integration

External growth occurs when a firm expands through merger, acquisition, joint venture or another agreement with an existing organisation. Horizontal integration joins firms at the same stage; vertical integration joins different stages of a supply chain.

Conglomerate growth crosses unrelated markets. External growth can provide scale, brands, technology or distribution quickly, but it brings purchase cost, culture clashes, duplicated assets and competition concerns.

A manufacturer buying a supplier is vertical backward integration; buying a rival is horizontal. The likely efficiency and market-power effects are different.

“Bigger after a takeover” does not prove economies of scale or success; examine integration costs, market structure and the reason for the deal.