2-1-1-Internal-Organic-Business-Growth

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Exam code:1BS0

Reasons to grow

Many firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)

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 and profitability	The desire for stronger market power (monopoly) over its customers and suppliers
Desire to reduce costs by benefitting from lower unit costs as output increases e.g suppliers offer bulk order discounts	Growth provides opportunities for product diversification	Larger firms often have easier access to finance

Business growth can be achieved by growing organically, or inorganically (mergers and takeovers)

Examiner Tips and Tricks

One of the goals of growth is to improve profitability. It’s important to remember the distinction between profit and profitability.

Profit is the absolute amount of money a company makes, while profitability is a measure of how efficiently a company generates profit relative to its revenue or investment.

Profitability is usually expressed as a percentage and is calculated by dividing the profit by the revenue (net profit margin and gross profit margin).

Retrenchment

Retrenchment involves a business scaling down its operations as it evolves and can involve
- Reducing the size of the workforce
- Closing less profitable outlets
- Exiting existing markets
Retrenchment can help a business to reduce costs and is particularly relevant for businesses whose objective is to survive

Internal (organic) business growth

Organic growth is growth that is driven by internal expansion using reinvested profits or loans
Organic growth (internal) is usually generated by
- Gaining a greater market share
- Product diversification
- Opening a new store
- International expansion (new markets)
- Investing in new technology/production machinery

Examples of organic growth

Business	Example
Apple	International Expansion (new markets) Apple expanded into new markets by opening its stores in new countries, such as China and India, and by partnering with telecom providers to sell its products. This helped them to organically increase their market share, sales revenue and profitability
Google	Product Innovation Google introduced new products such as Google Drive and Google Maps to complement its search engine and advertising businesses. This helped them to organically increase their market penetration, sales revenue and profitability
Disney	Product Diversification Disney has diversified into several areas such as theme parks, cruise lines, television networks, and movie studios. The brand strength has helped them to organically increase market penetration in each of these markets resulting in higher sales revenue and profitability

Product diversification opens up new revenue streams 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
- Integration speeds up growth but also creates new challenges

Advantages and disadvantages of internal (organic) growth

Advantages	Disadvantages
The pace of growth is manageable Less risky as growth is financed by profits and there is existing business expertise in the industry The management knows & understands every part of the business	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

Business GCES EDEXCEL