theme 3 : methods of growth for firms

growth of a firm can be measured by an increase in any of the following …

• increase in sales

• number of employees

• number of sites / locations

• number of assets

• number of liabilities

• increase in profit

• size of brand

• market share

what 2 ways can firms grow

• internally (organic)

• externally (inorganic)

internal / organic growth definition

• happens from within

• is natural

external / inorganic growth

• e.g. by buying another business to expand

internal growth explanation

• typically a slower process

• can be financed by asking shareholders to contribute more capital, or by ploughing back profits into the business

• main disadvantage is that it takes town, and in the meantime rivals might be expanding and gaining competitive advantage

• main advantage is that the business is able to maintain a solvent position (healthy financial position and able to pay costs)

4 methods of internal / organic growth increasing in risk

• increase in sales to existing customers

• increase in sales to new customers

• introduce new products

• diversify into new markets with new products

advantage of inc sales to existing customers

• easy - your customers already know your business product and experience

• loyalty schemes are an easy way to get existing customers to spend more

disadvantages of inc sales to existing customers

• limited growth opportunity as there’s a limit to how much your customers will go (not going 3x a day)

• customers may get sick of the product

advantage of inc sales to new customers

• potential for a sig increase in sales

• product that you know well, may only have to make a small change to marketing to attract more customers

• e.g. gymshark - used to only sell to makes, expanded to females and multiple countries

disadvantages of inc in sales to new customers

• overseas expansion comes with a risk of protectionism in ‘24, ‘25 and ‘26

• also cultural and language differences

• less control (diseconomies of scale)

• have to bring in logistics on supply chains

• additional costs for selling internationally

advantages of introducing new products

• already got a captive market of existing customers you can sell to - can rely on brand recognition for sales

• sig scope to increase sales can exploit cross price elasticity if they’re complimentary goods

disadvantages of introducing new products

• sig initial costs (research and development costs)

• if not a good product, could devalue your brand and people may think all your products are bad

• would get new rivals - could get into a price war

advantage of diversifying into new markets with new products

• potential to massively increase sales

• ability to sell existing products into new markets

disadvantages of diversifying into new markets with new products

• no experience of new market and new product - potential initially high costs (research and development costs)

2 methods of external / inorganic growth

• merger - two firms agree to join together to become one firm

• take over - one firm buys a controlling amount of shares in another