3.2.2: Organic growth

organic growth

a business growing by building on its strengths to increase sales

methods of growing organically

• new customers

• new products

• new markets

• new business model

• franchising

new customers

• reliant on driving sales from existing activities

• finding new customers by exploiting distribution channels

• needs investment in marketing

new products

• innovative and committed to research

• businesses can identify customers with slightly different needs

• requires adapting or modifying existing products

• invests profits into product development

new markets

• some businesses find new markets for their products

• assets, systems and working practices can be copied in new locations

• some may look to overseas markets

  • high risk - unfamiliar

• geographic expansion - growing by selling in new areas

new business model

• due to developments in technology or social change

• quick growth as the size of the potential market opened up could be considerable

franchising

allowing entreprenuers to trade under the name of the original business

organic growth - advantages

• low risk

  • well known practices

  • prevents errors

  • avoids complications when integrating with other organisations

• cheaper

  • financed from retained profit

  • zero financial cost

  • opportunity cost involved

• keep control

  • senior management has complete control of growth process

  • no outsiders with controlling interest

• better protection

  • protects financial position

  • less strain on financial resources

  • stronger cash flow

  • more in liquidity

• avoids diseconomies of scale

  • steady and measured growth avoids sharp increases in unit costs

  • easy to see difficulties that may rise from scale increases

  • controls costs

organic growth - disadvantages

• slow pace of growth

  • if too slow for stakeholders - sell shared, share price falls, risk of takeover

• lack of access to resources

  • prevents from using resources owned by other businesses

  • misses out on profitable developments

  • specialist companies

• unable to be competitive

  • slow growth leading to left behind in the market

• unable to fully exploit economies of scale

  • may have to operate with high costs for long

  • lowers profit margins

  • reduces competitiveness

• may be inappropriate

  • not appropriate if the market grows rapidly