Explain the difference

between internal and external

growth
The difference between internal (AO2) and external growth (AO3)

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
Business Growth
• The owners of many businesses
do not want the firm to remain
small
• Although some do for reasons of
remaining control, avoiding taking
too many risks and preventing
workloads from becoming too
heavy.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
 Why do other business owners and directors
of companies seek growth for their business?

1. Increased profits
2. Increased market share
3. Increased economies of
scale
4. Increased power and
status of the owners and
directors
5. Reduced risk of being a
takeover target

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
Figure 1.6.2 Different Forms of Growth

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
Internal growth (AO2)
• AO2 You need to be able to: Demonstrate application and analysis of
knowledge and understanding Command Terms: These terms require
students to use their knowledge and skills to break down ideas into
simpler parts and to see how the parts relate: Analyse, Apply,
Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
Internal Growth
(Organic 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.
• 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.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
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.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
However…

• Due to the relatively finite

resources available for internal
growth, it often takes far longer
to materialize 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.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
Exam Practice Question -
STC Manufacturing

• STC Manufacturing is a medium-sized company

based in Austria that 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 growth
strategy.
(a) Define the term organic growth. [2 marks]
(b) Describe two ways in which the market size
of the ball bearings industry in Austria might be
measured. [4 marks]

Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

Danyah Barqouni
Model Answer
(a) 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.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
Model Answer
(b) 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.
Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
External growth (AO3)
• You need to be able to: Demonstrate synthesis and
evaluation. Command terms these terms require you to rearrange
component ideas into a new whole and make judgments based on
evidence or a set of criteria. Compare, Compare and contrast,
Contrast, Discuss, Evaluate, Examine, Justify, Recommend, To what
extent

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
External Growth
(Inorganic Growth)

• External growth (also known

as inorganic growth) takes
place when an organization
needs the support of a
partner organizations for
growth.
• External growth is often
referred to as integration as it
involves bringing together two
or more firms.
• Examples for External Growth:
Mergers and acquisitions

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
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.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
However…
• External growth tends to be an expensive method of
growth and can radically change the nature and culture
of a business.
• Inorganic growth typically requires external sources of
finance
• It 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.

Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni