Internal Growth in Business

Study Notes

Internal growth, also known as organic growth, happens when a company expands using its own resources, such as retained profits, to invest in production facilities and new locations.
Large companies can also raise finance for expansion by selling shares on a public stock exchange.
New companies can raise share capital to fund business growth through an initial public offering (IPO) on the stock exchange.
The World's 11 largest IPO's include Saudi Aramco, Alibaba.com, SoftBank, Agricultural Bank of China, Industrial & Commercial Bank of China (ICBC), AIA, General Motors, NTT DoCoMo, VISA, ENEL SpA and Facebook.
Internal growth can result from increased sales revenues and higher profits, with retained profits being reinvested back into the organization.
Using bank loans to finance expansion is still considered internal growth because the bank is a third party, not a partner organization.
Companies pursue internal growth to foster brand awareness and loyalty, increase market share, maintain their corporate culture, maintain ownership and control of the organization, and avoid the high expenses and risks associated with external growth.
For example, McDonald's expanding its business with CosMc's is an example of internal growth because they are using their own resources and brand.
Internal growth can take longer to materialize than external growth due to limited resources.
It can lead to diseconomies of scale due to inefficiency and coordination problems caused by a large organization.

External growth, also known as inorganic growth, involves partnering with external organizations for expansion.
Examples of external growth include franchising, mergers, and acquisitions.
McDonald's works with franchisees, who pay to operate restaurants using the McDonald's brand and products, allowing McDonald's to expand through partner businesses.
Companies pursue external growth to grow at a faster pace, diversify their product portfolio, gain market share, gain customers in new and existing markets, and reduce competition in the industry.
Compared to internal growth, external growth is usually faster, but also more expensive, especially with mergers and acquisitions.
Inorganic growth typically requires external sources of finance and involves bureaucratic procedures.
Gaining trust from partner companies can be challenging for achieving inorganic growth.
External growth carries risks such as organizational culture clashes and diseconomies of scale due to inefficiencies created by a larger organization.