Chapter 11: Expansion and Integration of Firms

Question 1

What is ‘internal expansion’?

Answer 1

Definition:

• The expansion of a firm on its own (not involving another firm).

Examples:

• Boutique A opens more branches.
• Disneyland opens a theme park in Shanghai.

Question 2

What is ‘external expansion/integration’?

Answer 2

Definition:

• Grows by combining with another firm.

Examples:

• Boutique A combines with Boutique B.
• Cathay Pacific Airways Limited’s takeover of Hong Kong Dragon Airlines Ltd.

Question 3

What are the different types of expansion/integration?

Answer 3

Horizontal, Vertical (Backward & Forward), Lateral, Conglomerate

Question 4

What is ‘horizontal integration’?

Answer 4

Definition:

• Expands into a business that is engaged in the same production stage of the same products that are directly competitive.

Examples:

• Cathay Pacific Airways Limited’s takeover of Hong Kong Dragon Airlines Ltd.
• Boutique A opens more branches.

Question 5

What is ‘forward vertical integration’?

Answer 5

Definition:

• Expands into a business in a preceding stage of production of the same product.

Examples:

• A T-shirt manufacturer sets up a weaving factory.
• Sing Tao Daily took over a printing company to print its newspaper in 2002.

Question 6

What is ‘backward vertical integration’?

Answer 6

Definition:

• Expands into a business in a later stage of production of the same product.

Examples:

• A T-shirt manufacturer sets up a boutique.
• A flour making factory merges with a bakery.

Question 7

What is ‘lateral integration’?

Answer 7

Definition:

• Expands into a business of related but not competing products.

Examples:

• A bread making factory sets up a factory that makes cookies.
• MTR co. Ltd merged with KCRC in 2007.

Question 8

What is ‘conglomerate integration’?

Answer 8

Definition:

• Expands into a business of unrelated products.

Examples:

• A newspaper publisher sets up a restaurant.
• A T-shirt manufacturer takes over a bakery.

Question 9

What are some general motives that apply for any expansion/integration?

Answer 9

• To benefit from economies of scale.
• Making more efficient and flexible use of resources.

Question 10

What are some special motives for ‘horizontal integration’?

Answer 10

1. Increase market share
   With a larger market share, the firm has more ability to influence the market price.
2. Reduce competition
   Turns competitors into partners
3. Reduce duplication of facilities (for integration only)
   The combined firm can cut some duplicate resources to save on costs.

Question 11

What are some special motives for ‘backward vertical integration’?

Answer 11

1. Secure the supply of inputs
   Reduce risk of production disruption caused by inadequate input supply.
2. Reduce transaction expenses between different production stages
   Cost of trading inputs and outputs.

Question 12

What are some special motives for ‘forward vertical integration’?

Answer 12

1. Secure market outlets of inputs
   Ensure enough market outlet for its own products.
2. Obtain market information more easily
3. Reduce transaction expenses between different production stages
   e.g. Cost of researching information, negotiation, contracting etc.

Question 13

What are some special motives for ‘lateral integration’ or ‘conglomerate integration’?

Answer 13

1. Spread risk through product diversification
   Loss in one business may be compensated for by a gain in another. Diversifying investment over different industries can spread risks.
2. Extend its brand name to other products
   With an established brand name’s goodwill, marketing costs can be saved when the brand of the company can be extended to other businesses.