Internal (Organic) Business Growth

Reasons why businesses grow

• Owners/Shareholders/Managers desire to run a large business & continually seek to grow it

• Owners/Shareholders desire higher levels of market share (the % of the total market revenue that a single firm has) and profitability

• The desire for stronger market power (monopoly) over its customers and suppliers

• Desire to reduce costs by benefitting from lower unit costs (the total costs of producing one unit of output) as output increases

• Growth provides opportunities for product diversification (when a firm is able to increase the number of products it offers & reduces risk - if one product fails others may well still be successful)

• Larger firms often have easier access to finance
  

Business growth can be achieved by…

growing organically (when expansion takes play from within a business e.g. expanding the product range or number of locations) or inorganically (mergers and takeovers)

One of the goals of growth is to…

improve profitability - usually expressed as a percentage and is calculated by dividing the profit by the revenue (net profit margin and gross profit margin)

How organic growth is usually generated

• gaining a greater market share

• product diversification

• opening a new store

• international expansion (new markets)

• investing in new technology/production machinery

Product diversification opens up…

new revenue streams (source of sales revenue) for a business. Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream

Firms will often grow organically to the point where they are in a…

financial position to integrate (merge or buy) with others. This speeds up growth but also creates new challenges

Advantages of internal business growth

• The pace of growth is manageable

• Less risky as growth is financed by profits and there’s existing business expertise in the industry

• The management knows & understands every part of the business

Disadvantages of internal business growth

• The pace of growth can be slow and frustrating

• Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to

• Access to finance may be limited