Acquisition

Also called a takeover, this method of external growth involves one company buying a controlling interest (majority stake) in another company.

Backwards vertical M&A

If the purchaser buys a company further away from the consumer in the chain of production.

Conglomerate M&A

Also known as diversification, this form of external growth occurs when two businesses in unrelated industries integrate through a merger or acquisition.

Diseconomies of scale

Growth that is excessive results in inefficiencies and higher average costs of production, perhaps due to problems such as miscommunication, misunderstandings and poor management of resources.

Economies of scale

These are cost-saving benefits enjoyed by a business as it increases the size of its operations, i.e. lower average costs (the cost per unit).

External economies of scale

Category of economies of scale that occurs when a firm’s average cost of production falls as the industry grows, i.e. all firms in the industry benefit.

External growth

Also known as inorganic growth, this takes place when an organization requires the support of a partner organizations for its growth.

Financial economies of scale

Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages as they represent lower risk.

Forward vertical M&A

Also referred to as forward vertical integration, this growth strategy occurs when one business buys another firm that is closer to the consumer in the chain of production.

Franchise

This growth strategy involves the right to trade using another company’s products, brand name and corporate logo.

Franchising

A growth method that involves two parties, with the franchisor giving the licensing rights to a franchisee to sell goods and services using the franchisor’s brands and products.

Globalization

Refers to the process of greater integration and interdependence of businesses and economies throughout the world.

Horizontal M&A

Also known as horizontal integration, this growth strategfy occurs when a merger or acquisition occurs between two companies operating within the same industry (that is, they are competitors).

Internal economies of scale

Category of economies of scale that occurs for and within a particular organization (rather than the industry in which it operates) as it grows in size.

Internal growth

Also known as organic growth, this takes place when an organization expands without the help of an external partner firm.

Joint venture

An external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time.

Managerial economies of scale

Larger businesses can afford to hire specialist functional managers, thus improving the organization’s efficiency and productivity.

Marketing economies of scale

Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.

Merger

This form of external growth involves two or more companies agreeing to form a single, larger company thereby benefiting from operating on a larger scale.

Multinational company (MNC)

A business that operates in two or more countries, or is legally registered in more than one country.

Optimal output level

The level of output where the average cost of production is at its lowest value, so at this level of output, profit is maximised.

Purchasing economies of scale

Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).

Risk bearing economies of scale

Large businesses can bear greater risks than smaller ones due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.

Specialization economies of scale

Larger firms can afford to hire and train specialist workers, thus helping to boost output, productivity and efficiency (thereby cutting average costs of production).

Strategic alliances

These are formed when two or more organizations join together to benefit from external growth without having to set up a new separate legal entity.

Technical economies of scale

Cost savings by greater use of large-scale mechanical processes and specialist machinery, e.g. mass production techniques.

Vertical M&A

When an acquisition or takeover occurs between two companies operating in different industries.