3.2.3 Organic Growth

Organic and External Business Growth

Business growth

🔗 Where the business reaches the point of expansion and seeks additional options to generate more profit.

Why firms choose to grow

• Economies of scale -> Cost competitive
• Increase brand recognition and market share
• Improve shareholder satisfaction (higher dividends from higher profits)
• Increase market power over customers and suppliers

Issues that can occur with growth

• Diseconomies of scale (Wage rises, wastage, machinery getting worn out)
• Over expansion resulting in high fixed costs and lower profits
• Lack of communication leads to worse corporate culture -> lower motivation and more mistakes

Organic Growth

🔗 Where a business stimulates growth by expanding from within, using its own capabilities and resources.

• Expanding product range -> Access to more markets increasing customer base whilst reducing reliance on one revenue stream
• Opening new business locations -> Increases exposure and strengthens brand
• Investing in capital machinery -> Economies of scale -> Improves profit margins

Pros and cons of organic growth

• Lower risk as business builds on existing strengths (no risk of changing culture)
• Can be financed internally via retained profits
• Allows business to grow at a sensible rate to prevent overtrading and customer demands are met (excess demand from over-expansion)
• Dissatisfaction of stakeholders -> Shareholders prefer faster growth
• Opportunity cost -> Businesses may miss out on lucrative opportunities for better growth

External Growth

🔗 Where a business grows revenues and profits by taking over or merging with other businesses.

• Acquiring brands – buying a brand or patent (E.G Nestle bought Rowntree for KitKat and Smarties)
• Eliminates the competition (E.G Facebook buying WhatsApp)
• Can now operate on a larger scale of output due to increased means of production (E.O.S)