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As mentioned, businesses can achieve growth organically; through acquiring or merging with other businesses; through expanding into other markets (e.g. countries); or through engaging in an alliance with one or more other businesses. This lesson delves into some of the ways in which businesses can achieve growth without acquiring or merging with other businesses.

Internal/organic growth

Internal (or “organic”) growth occurs when a business employs internal strategies to expand its own activities and consequently increases its market share, customer base, revenues and (hopefully) profits. Internal growth might be achieved, for example, through effective marketing and branding; expanding the business’ presence in existing markets (e.g. by opening new stores or focusing more on e-commerce); entering new markets (perhaps through exporting to other jurisdictions); diversifying the business’ range of products and services; licensing aspects of the business to other organisations; and/or franchising the business. Below are some of the advantages and disadvantages of growing a business organically.

✓ Reduced risk: there is generally less risk in the sense that growth depends more on a natural increase in demand, rather than estimates and projections of the potential returns that an acquisition could generate.

✓Easier integration: easier for a firm to retain its culture, protect its brand and maintain effective communication.

✗ Slower expansion: growth may be slower than growth achieved through acquiring other organisations.

✗ Costs: it can be expensive to build brands from scratch in new jurisdictions, as this can require extensive market research and large-scale promotional campaigns.

✗ Increased risk: Foreign Direct Investment (FDI), for instance opening a new store abroad, is risky as it can be difficult to break into new markets if more established competitors exist. In contrast, exporting or franchising can be less risky alternatives, as these do not require direct investment (such as purchasing a factory or an office building abroad).

Exporting: when businesses sell products from their home countries to other countries. It can enable businesses to expand their operations without committing to direct investment in another country, thus reducing risk and costs. However, distribution (e.g. transportation) costs, currency value fluctuations and potentially high taxes may hinder effective cost control, whilst the effectiveness of exporting will depend somewhat on a business' knowledge of the relevant foreign market(s) and its ability to access any resources needed to effectively distribute and promote its offering abroad.

Franchising: when businesses (franchisors) sell the right to others (franchisees) to set up identical businesses under the same name (typically using the same brand and selling the same products) in exchange for a lump sum payment and/or royalties. This can enable rapid expansion that boosts a franchisor’s brand exposure and customer base, without the franchisor needing to fund such expansion. However, although a franchisor can usually exert some control over franchisees, it can be difficult to ensure that franchisees refrain from acting in a manner that damages the brand of the original business (and any other franchises).

Licensing: when one business (a licensor) permits another (a licensee) to use an element of its business, for instance the right to manufacture its products, incorporate its technology into a product or use its intellectual property rights, usually in exchange for a royalty. If a business lacks the capabilities to commercialise a product but has developed the technology, licensing to another business that’s able to commercialise it could provide a source of revenue. However, if the technology is embedded into a product, the licensor may generate little brand recognition or customer loyalty, whilst there’s also a risk that the licensee will expropriate the technology and emerge as a competitor. 

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