IB Docs (2) Team
Internal and external growth
Organizations that pursue growth can choose from two broad methods: internal and/or external growth.
Internal growth (also known as organic growth) takes place when an organization expands without the help of an external partner firm. Instead, it uses its own resources to do so, such as using retained profits to invest in production facilities in new locations. Large companies can also sell shares on a public stock exchange to raise finance for expansion, whilst new companies can raise share capital (to fund business growth) from an initial public offering (IPO) on the stock exchange.
Case Study 1 - The World's 11 largest IPOs
Saudi Aramco, Saudi Arabia, $29.4 billion
Alibaba.com, China, $25 billion
SoftBank, Japan, $23.5 billion
Agricultural Bank of China, China, $22.1 billion
Industrial & Commercial Bank of China (ICBC), China, $21.9 billion
AIA, Hong Kong SAR, $20.5 billion
General Motors, USA, $20.1 billion
NTT DoCoMo, Japan, $18.4 billion
VISA, USA, $17.8 billion
ENEL SpA, Italy, $17.4 billion
- Facebook, USA, $16.0 billion
Source: Adapted from Statista
Organic growth, or natural growth, comes about from increased sales revenues and higher profits, with retained profits being reinvested in the organization. Using bank loans to finance expansion of the organization is still considered as internal growth as the bank is a third party, rather than a partner organization in the pursuit of growth.
Business organizations pursue internal growth for several reasons, including:
To foster brand awareness and brand loyalty
To increase market share
To maintain its corporate culture
To maintain ownership and control of the organization
To avoid the comparatively high expenses and risks associated with external growth.
However, due to the relatively finite resources available for internal growth, it often takes far longer to materialise than with methods of external growth. In some cases, organic growth can even lead to diseconomies of scale caused by inefficiency and coordination problems of being too large.
By contrast, external growth (also known as inorganic growth) takes place when an organization needs the support of a partner organizations for growth. For example, McDonald’s uses franchisees who buy McDonald’s restaurants and operate using the franchisee’s brands and products. The franchisee pays for this, helping McDonald’s to grow through partner businesses. Mergers and acquisitions are other examples.
Business organizations pursue external growth for several reasons, including:
To grow at a faster pace
To diversify their product portfolio
To gain market share
To gain customers in new and existing markets
To reduce competition in the industry.
External growth is usually faster than internal growth, but also more expensive to execute (especially in the cases of mergers and acquisitions). Inorganic growth typically requires external sources of finance, and also involves a lot of bureaucracy. Gaining trust from partner companies can be another hurdle for achieving inorganic growth. It also carries significantly more risks, such as organizational culture clashes and diseconomies of scale due to the inefficiencies created by the larger organization.
Case Study 2 - The evolution of famous brands and products
Brand/product | Original purpose |
7-Up | |
Bubble Wrap | |
Coca-Cola | |
Duct Tape | |
Frisbees | |
Hugo Boss | |
Listerine* | |
Play-Doh | |
Ray-Ban | |
Viagra |
* According to Freakonomics, sales revenue increased from $115,000 to more than $8 million within 7 years of rebranding Listerine as an oral healthcare product!
Case Study 3 - Samsung
Although Samsung is best known for its smartphones and other consumer electronics products (such as televisions and digital cameras), the South Korean conglomerate is also involved in advertising, construction, food processing, insurance, textiles, ship building, theme park management, and weapons manufacturing!
Founded in 1938, Samsung is the largest South Korean conglomerate. The company did not enter the consumer electronics industry until the late 1960s. According to Forbes, by the end of 2022, Samsung was the 4th largest global technology company as measured by brand value.
Case Study 4 - Starbucks
Watch this short video about how Starbucks was founded by three college friends and went onto becoming the world's largest retailer of coffee. The success story of Starbucks' growth strategy is impressive, expanding from its first coffee bean store in Seattle, USA, to over 33,830 stores in 80 countries across the world. Today, nearly two thirds of all coffee sold in the USA come from a Starbucks store.
Starbucks has transformed from a single coffee bean store in Seattle in 1970 to more than 31,000 coffee shops across the world - a great real world example of growth. Under the leadership of Howard Schultz - the first Director of Marketing and Sales at Starbucks - pursued a strategy of aggressive expansion in the late 1980s and early 1990s. By the time the company went public in 1992, it had 165 stores, and Schultz had co-bought the company and become the CEO of Starbucks.
Four years later, Starbucks opened its 1,000th store, including international locations in Japan and Singapore. Growth was so rapid that, just two years later, Starbucks had opened its 2,000th coffee shop. For Schultz, Starbucks was to be more of an experience than simply a cafe to buy a coffee beverage.
Other Business Management topics/terms (mentioned in the video) that could be discussed in class, including:
Branding
Changing consumer preferences
Market saturation
Profit cannibalization.
Business Management Toolkit (BMT)
Examine how knowledge of SWOT analysis can help managers to make more informed decisions about methods of internal and external growth.
You might find it useful to refer to BMT 1 - SWOT analysis prior to answering the above task.
Exam Practice Question - STC Manufacturing
STC Manufacturing is a medium-sized company based in Austria. The publicly held company makes ball bearings for other producers such as bicycle manufacturers. The company was established in 2009. STC Manufacturing seeks to grow organically as the market size has continually increased. During the past few years, the company has relied on a combination of retained profits, loan capital, and issuing of new shares in order to finance its organic growth strategy.
(a) | Define the term publicly held company. | [2 marks] |
(b) | Define the term organic growth. | [2 marks] |
| (c) | Describe two ways in which the market size of the ball bearings industry in Austria might be measured. | [4 marks] |
Teacher only boxAnswer
(a) Define the term publicly held company. [2 marks]
A publicly held company is a joint-stock company owned by shareholders. The shares in a publicly held company can be bought and sold by the general public, via a stock exchange, without prior approval of existing owners.
Award [1 mark] for a definition that shows some understanding of publicly held company.
Award [2 marks] for a definition that shows good understanding of publicly held company, similar to the example above.
(b) Define the term organic growth. [2 marks]
Organic growth occurs when a business expands internally by using its own resources to increase the size of its operations. For example, STC Manufacturing has used a combination of retained profits, loan capital and issuing of new shares to finance its internal growth, rather than relying on external methods such as a merger, takeover, joint venture or strategic alliance with another manufacturer.
Award [1 mark] for a definition that shows some understanding of organic growth.
Award [2 marks] for a definition that shows good understanding of organic growth, similar to the example above.
(c) Describe two ways in which the market size of the ball bearings industry in Austria might be measured. [4 marks]
Possible measures could include:
Total value of sales revenue of the ball bearings industry in Austria
The number of workers employed in the ball bearings industry in Austria
The overall profits earned by all ball bearings companies in the country
Market capitalization (the market value) of all companies in the ball bearings industry
The rate of growth in any of the above factors/measures
Accept any other relevant measure of market size that is outlined in the context of the case study.
Award [1 mark] for each valid measure of market size that is identified, and [1 mark] for a description of each of these, up to the maximum of [4 marks].
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