Chapter 50- Organic Growth

Question 1

Inorganic Growth

Answer 1

A business growth strategy that involves two (or more) businesses joining together to form one much larger one

Question 2

Organic Growth

Answer 2

A business growth strategy that involves a business growing gradually using its own resources

Question 3

Methods of growing organically-

Answer 3

• New customers – to rely on driving sales from existing activities – for example a food company supplying local shops may gradually step up production to supply more and more customers
• New products – may grow by developing products – they may be very innovative and committed to research and development – for example a business that designs software for computer games can grow by designing new games
• New markets – Some businesses grow organically by finding new markets for their products, for example, a hairdresser could open another salon in a different location – the assets, systems and working practices used in the original salon can be replicated in another location. Some businesses may look to overseas markets to grow.
• New business model – it is possible to grow organically by using the same business model – developments in technology or social change may give rise to such a step.
• Franchising – To speed up organic growth a business might set up a franchising operation – this approach allows other entrepreneurs to trade under the name of the original business.

Question 4

Advantages of organic growth

Answer 4

• Less risky than other growth strategies- it prevents change in culture etc. within the business and prevents diseconomies of scale
• Relatively cheaper- it can be done using retained profit, which is likely the cheapest of all sources of finance.
• Retain more control – owners will have complete control over the growth because there are no outsiders with any controlling interest – They can go in, recruit and train new staff, and ensure the store is run in the way that has proven success in the past – this means the business has full control and is much easier to organise
• Financial position is better protected- because there is less strain on resources

Question 5

Disadvantages of organic growth

Answer 5

• May be too slow for some stakeholders, therefore they will lose money. Particularly in PLCs, shareholders may want quicker returns for their investments, if they are unhappy, they may sell their shares.
• May get left behind in the market – organic growth may prevent the business from ‘tapping into’ the recourses owned by other businesses – as a result it might miss out on some profitable developments
• Businesses may get left behind in the market – if the growth rate is too slow, businesses may get left behind in the market – if competitors are growing through mergers and acquisitions, the business may end up feeling small in comparison – as a result it may lose its ability to compete effectively
• May be too small for economies of scale