Business - 1.5 Internal and External Growth

Internal Growth: Definition

solely improving and expanding current assets and capabilities

Organic growth: when a business grows organically “under its own steam”

• changing price: proportionally more sales revenue (if few substitutes, higher price can work)

• effective promotion: customers are more likely to buy a product if they are informed, reminded, persuaded of its benefits

• producing better products: market research, innovation, new product development → more appealing → raise sales

• sell through a greater distribution network: widely available product = customers are more likely to buy it

• preferential credit ‘buy now and pay later’: pay in regular installments for purchase of expensive products → attract more customers to the market

• increased capital expenditure and expansion: Internal expansion (new locations or intro of new production processes or technology)

• improved training and development: vital as customers are unlikely to buy from people with little to no product knowledge; makes staff more confident and competent, motivate the workforce to feel more valued; improve the level of customer service, contributing to greater customer loyalty and higher sales

• brand image (quality, after-sales care, brand image, maintenance costs, environment considerations)

External Growth: Definition

efforts to expand operations, market presence, product offerings through means outside existing structure

• Joint ventures

• Mergers and Acquisitions (M&As)

• Takeovers (takeovers and hostile takeovers)

• Franchising

• Strategic alliances

Internal Growth: Advantages

✅ better control and coordination: firm maintains most control

✅ inexpensive: retained profits

✅ corporate culture: no culture clashes or conflicting management styles

✅ less risky

• builds on strengths of the firm (brand and customer loyalty)

Internal Growth: Disadvantages

❌ Diseconomies of scale: higher unit costs; communication problems; slower decision-making

❌ restructure: requires time, effort, money, training, hiring specialist managers and higher salaries

❌ dilution of control and ownership: changing legal status causes original owners to have to share decision-making with shareholders; decision-making is prolonged and more likely to conflict in interests

❌ slower growth: internal growth is slower than external growth

External Growth: M&A Advantages

✅ Greater market share: greater market power and larger customer base

✅ Economies of scale: larger scale operations help lower unit costs, improving competitiveness and profit margins

✅ Synergy: have access to each other’s resources (distribution channels, new tech, human resources, management advice), which boosts productivity and profits

✅ Survival: fast method of growth, defensive strategy allows the new firm to be in a stronger position to compete with rivals

✅ Diversification: diversity product mix, benefit from larger customer base and reduce risks

External Growth: M&A Disadvantages

❌ Redundancies: job losses may occur due to cost savings (ex: the business won’t need two finance directors)

❌ Conflict: potential disagreements and arguments

❌ Cultural clash: may need to entail changes to the firm’s core values and mission statement

❌ Loss of control: original owners will lose some degree of control as the new board of directors will need to be restructured

❌ Diseconomies of scale: larger firm may suffer from increased bureaucracy and longer channels of communication, leading to less effective decision-making

❌ Regulatory problems: governments may be concerned with and prevent M&As if they create a monopoly

External Growth: 4 Types of Integration

1. Horizontal Integration: amalgamation or integration of firms operating in the same industry

2. Vertical Integration: between businesses at different stages of production

   • Forward Vertical Integration: amalgamation of businesses heading towards the end stage of production

   • Backward Vertical Integration: merger or acquisition of supplier in its value chain

3. Lateral Integration: M&As between firms that have similar operations but do not directly compete with each other

4. Coglomerate M&As: amalgamation