What’s it: Internal growth, or organic growth, refers to expanding the business and using the resources and capabilities of its own internal. The company uses higher sales and profits to reinvest in the business. Organic growth is an alternative to external growth in growing a business.
How to do it: Some of the options that companies can choose to grow organically, including:
- Increasing the number and quality of employees make the output bigger.
- Expanding the production capacity of existing products, for example by buying new machines
- Opening new outlets, factories or branch offices
- Designing products more attractive to customers, thereby increasing units sold.
- Improving the marketing of its products to drive sales
- Investing in research and development
Internal growth advantages
Cheaper. Companies typically rely on internal financing for expansion – such as retained earnings – instead of external funding such as bonds. So, the company does not need to pay regular interest.
Less risky. Management has more control over the resources used to grow. That contrasts with acquisitions, which involve another party.
Maintain control of the business. Conversely, external growth may require additional capital increases, which may lead to changes in ownership.
The company’s values and culture endure. Both are internal capabilities that explain why companies are successful. External growth may degrade such capabilities because it requires the synergy of two different values and cultures.
Internal growth disadvantage
Slower growth. The company only relies on internal resources. That is in contrast to a merger or acquisition that integrates the resources, markets, and customers of two companies. Sometimes, shareholders may prefer external growth because it offers faster growth to lift its share price.
Depends on the stage of the industrial cycle. Suppose the industry has entered a mature stage. In that case, it will be difficult for companies to increase the size of the business further. This phase will usually lead to a decline phase, where the market size will shrink.
Limited expansion. Companies find it challenging to build market share if the business is already a market leader.
Vulnerable to liquidity problems. Expansion is long term. And, companies may delay expansion projects due to liquidity issues, which are short term.