Organic growth
- Organic (internal) growth means growing from within: opening new branches, launching new products, entering new markets or selling online.
- It is lower risk and the owners keep control, but it is slow. It is often paid for with retained profit or loans.
External growth
- A merger is when two businesses agree to join together to form one business. A takeover is when one business buys a controlling share (more than half) of another.
- External growth is fast and can bring market share, skills and brands, but it is expensive, and can lead to culture clashes and job losses.
- Horizontal integration joins businesses at the same stage in the same industry, such as two supermarkets. Backward vertical integration means buying a supplier; forward vertical integration means buying a customer, such as a retailer. A conglomerate joins businesses in unrelated industries.
Economies and diseconomies of scale
- Economies of scale are the lower average (unit) costs a business gets as it grows: bulk-buying discounts (purchasing), better technology (technical), cheaper loans (financial) and advertising spread over more sales (marketing).
- Diseconomies of scale are the higher average costs that come from growing too large, such as poor communication, low motivation and coordination problems.
Key terms
- Organic growth
- Growing from within the business, such as by opening new branches.
- Merger
- Two businesses agreeing to join together.
- Takeover
- One business buying a controlling share of another.
- Horizontal integration
- Joining a business at the same stage of production in the same industry.
- Vertical integration
- Joining a business at a different stage of production, such as a supplier.
- Economies of scale
- Lower average costs as a business grows.
- Diseconomies of scale
- Higher average costs because a business is too large.
- Average cost
- Total costs divided by the number of units produced.