Q&A - Explain “organic” or internal growth

Internal (or organic growth) can be defined as: “Expansion from within a business by expanding the range of products and/or locations”

As you read the business news or watch business stories on television on online, you should be able to identify lots of stories of businesses that are growing organically. Here are some good examples…

Dominos UK has grown strongly in recent years through a rapid expansion of the number of Dominos Pizza outlets and significant growth in amounts sold per store
Apple has followed an organic growth strategy by focusing on the development and launch of new products like the iPad and iPhone
Hotel chains like Jury Inns achieve growth by investing in new hotel locations and by refurbishing existing hotels to boost revenues

Keep a look out for these kinds of business stories and add them to your notes. Has the business achieved organic growth by adding new products, expanding into new geographical areas, or increasing its share of the market?

Internal growth builds on the business’ own capabilities and resources. For most businesses, this is the only expansion method used. Internal growth involves approaches such as:

- Designing and developing new product ranges
- Implementing marketing plans to launch existing products directly into new markets (e.g. exporting)
- Opening new business locations – either in the domestic market or overseas
- Investing in research and development to support new product development
- Investing in additional production capacity or new technology to allow increased output and sales volumes
- Training employees to help the best acquire new skills and address new technology

Whilst these approaches are not easy, they are generally considered to be lower risk than the alternative – acquisitions or joint ventures. However, the major downside of focusing on internal development is that
the speed of change or growth in the business may be too slow.

What are the advantages and disadvantages of internal/organic growth? Here is a summary:

Advantages
Less risky than taking over other businesses
Can be financed through internal funds (e.g. retained profits)
Builds on a business’ strengths (e.g. brands, customers)
Allows the business to grow at a more sensible rate

Disadvantages
Growth achieved may be dependent on the growth of the overall market
Harder to build market share if business is already a leader
Slow growth – shareholders may prefer more rapid growth
Franchises (if used) can be hard to manage effectively