Internal And External Growth Of A Business

There are two primary growth strategies for business. The type of business strategy you choose will depend on several factors, including the size of your business, the capital available to you, and your goals for the future. Both the internal and external growth of a business require forethought and strategy planning. Here are the definitions, so you can decide what’s right for you.

Internal Growth

Internal or organic growth strategies focus on expanding the capabilities of the business by using the company’s own resources. These are long-term strategies that require a personal investment of time and money. One survey showed that 75 percent of small-business owners want to grow their firms, although some expressed concern that expanding their business would increase their dependence on outsiders. Internal growth strategies allow business owners to maintain control and keep the quality of their products or services high, with less reliance on external forces.

A study comparing the growth strategies of several companies found that, while both internal and external growth strategies can positively affect returns, internal growth strategies offer higher cash flow returns.

Some internal growth strategies include:

  • Hiring new staff
  • Improving manufacturing techniques
  • Developing new products or services
  • Expanding the customer base
  • Creating more effective marketing strategies

External Growth

External growth strategies typically involve mergers or acquisitions. Unlike internal growth strategies, in which funds are reinvested in the business to expand output or demand, external growth strategies use corporate funds to purchase other companies. This is, obviously, a much faster route to expand a business than an internal growth strategy, but it’s also riskier.

There are several complications that can arise during mergers and acquisitions (M&A), and many attempted corporate takeovers are unsuccessful. In addition to cultural issues, there are logistical problems when trying to combine two separate companies into a single, unified corporation. Failure rates typically range from 50-70 percent; although an external growth strategy may be a faster route to success, it’s also fraught with risk.

Think of the story of the tortoise and the hare. Internal growth is like the tortoise—slow and steady. External growth is like the hare—faster, but more unpredictable and risky. If your business is already large and successful, external growth might be the way to go, since you have less to lose if it doesn’t work. But internal growth strategies are a safer, surer bet, and will help you grow your business in the long and short term. Some companies seek a compromise, with strategies that incorporate both the internal and external growth of a business to support their long-term and short-term goals. There is no right answer; it all depends on the situation.

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Sources:
http://www.nfib.com/article/xpansion-are-externa-59030/
http://www.cereg.dauphine.fr/UserFiles/File/Paper_Samaras.pdf
http://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-ma-consulting-cultural-issues-in-ma-010710.pdf
http://fortune.com/2014/11/05/aptean-sencha-business-applications/
http://www.ccl.org/leadership/pdf/publications/lia/v24n5together.pdf

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