Organic Growth Flashcards
What is organic growth?
Organic growth is expansion of a single business by extending its own operations using retained profit, loan capital or funded by share capital. There are several approaches to achieve this.
New customers
Businesses may decide to increase production to supply to more customers.
They can grow organically by extending or moving to larger premises if their factory reaches full capacity.
It may also be possible to reach new customers by exploiting new distribution channels.
This method may require investment in marketing to increase customer base.
New products
Businesses can grow organically by developing new products.
They could be innovative and introduce new ideas.
Or they could modify existing products to meet customer needs.
This method may require them to invest some of their profit into product development.
New markets
Businesses can grow organically by finding new markets for their products. (Hairdresser opening another salon in a different market).
Some may consider to grow to overseas markets (geographic expansion). However this can be risky as markets abroad may be unfamiliar.
New business model
Evolution in technology or social change may lead to internal growth.
Businesses could decide to operate in e-commerce which will allow them to reach a larger customer base hence increase sales and revenue.
They will grow globally.
Franchising
A business might set up a franchising operation to increase speed of organic growth.
This enables a business to expand both nationally and internationally strengthen the brand and reach of a company.
They can also have:
Buying power -network of franchises can buy materials in bulk and a discount rate
Lower risk
Higher profit
Advantages
Less risky- can be achieved by extending/developing activities that are well known. This can prevent errors since the culture, norms and process are already established.
Relatively cheaper- It can be financed from retained profit (money ploughed back into the business after tax or dividend payments)
Keep control- Owners and senior management team will have complete control over the growth process since there is no external interest. This ensures that the business is run in the way they know to be successful. It also makes it much easier to organise.
Better protection- organic growth helps to better protect the financial position of the business. As growth is gradual there is less strain on financial resources - stronger cash flows - more liquidity.
Avoid diseconomies of scale- sharp increases in unit costs are unlikely if growth is steady and measured. Easier to spot difficulties resulting from scale increase when growing organically. Helps keep costs under control
Disadvantages
Slow pace of growth- Too slow for some stakeholders. Shareholders in a plc may want the business to provide quicker returns on their investments than organic growth can deliver. They may sell their shares if unhappy which will result in share price fall and make the company at a risk of a takeover.
Lack of access to resources- could miss out some profitable developments as they dont get access to other businesses’ resources. Takeover or merging allows them to use other companies expertise.
Unable to be competitive- they may be left behind in the market since they grow slowly. If competitors grow through mergers and acquisitions the company would be smaller and incapable to compete effectively.
Unable to fully exploit economies of scale- it would take longer for them to be able to exploit economies of scale as they will be growing slowly. This could mean that they will have to operate with higher costs for a longer period of time.
May be inappropriate for businesses in rapid growing markets
Other methods of organic growth
outsourcing
horizontal growth
e-commerce
opening new stores
