Methods of Business Growth
Why Do Businesses Want to Grow?
Once a business has survived its early years, the owners often set their sights on growth. A larger business can spread its fixed costs across more units, negotiate better prices with suppliers and gain a stronger foothold in its market. Growth can happen in two broad ways: internal (organic) growth or external (inorganic) growth. Choosing the right method depends on the business’s resources, risk appetite and strategic goals.
Internal growth uses the business’s own resources — launching new products, entering new markets or investing in research and development. External growth is faster but involves acquiring or merging with another business.
Internal (Organic) Growth
Internal growth comes from within the business itself. A company might invest in research and development (R&D) to launch innovative products that attract new customers. Alternatively, it can enter new markets — for example, a UK clothing brand opening an online store to sell internationally, or changing its pricing and promotion to attract a different customer segment. Technology has made internal expansion faster: e-commerce platforms let a small business sell to customers worldwide without the cost of physical stores.
Internal growth is generally lower risk because it builds on what the business already knows. It avoids the problems of integrating a different company’s culture, systems and staff. However, it is usually slower than external growth and relies on generating enough cash or profit to fund expansion.
External (Inorganic) Growth
External growth involves combining with or taking over another business. A merger is when two businesses voluntarily agree to join together. A takeover is when one business purchases a controlling interest in another — this can be agreed or hostile. External growth is quicker than organic growth and can give a business immediate access to new markets, brands, technology or skilled staff. For example, a supermarket chain acquiring a smaller rival instantly gains its store network, customer base and supplier contracts.
External growth can be very attractive because it is fast and removes a competitor at the same time. Mergers and takeovers can create economies of scale — the combined business can buy supplies in larger quantities and reduce per-unit costs. However, integrating two different companies is complex and expensive. Staff may be made redundant, cultures may clash and customers can become confused if brand identities merge poorly. Some takeovers have destroyed shareholder value when the purchase price was too high or the two businesses were a poor strategic fit.
Public Limited Companies (plc)
As a business grows, it may need more capital than its owners or bank can provide. One option is to convert to a public limited company (plc). A plc floats its shares on the stock market through a process called stock market flotation. Members of the public, investment funds and other businesses can then buy shares. This raises large amounts of capital that can fund rapid expansion, research or acquisitions. Well-known UK plcs include Tesco, Marks & Spencer and Rolls-Royce.
Becoming a plc brings significant benefits but also serious obligations. Shareholders expect dividends and rising share prices. The company must publish detailed financial accounts, making its performance visible to competitors. Directors can face pressure from institutional investors to deliver short-term profits, which may conflict with long-term growth strategies.
Growing businesses can use internal finance (retained profit and selling assets) or external finance (loan capital and share capital). Only public limited companies can raise share capital via stock market flotation.
Sources of Finance for Growth
A growing business has four main sources of finance. Retained profit is the most flexible internal source — no interest to pay and no loss of ownership. A business can also raise cash by selling assets it no longer needs, such as unused machinery or a surplus property. These internal sources avoid debt but may be limited in size.
External sources include loan capital, which provides a lump sum but requires regular repayments and interest charges. The second external source is share capital. For a private limited company (Ltd), new shares can only be sold to people the owners choose. A plc can sell shares to the general public on the stock exchange, giving access to far larger sums. The trade-off is that each new shareholder owns a slice of the business and has voting rights at annual meetings.
Students often confuse “internal growth” with “internal finance” — these are separate ideas. Internal growth means expanding by using the business’s own capabilities (new products, new markets). Internal finance means funding expansion using money already inside the business (retained profit or asset sales). A business can pursue internal growth using external finance (e.g. taking a bank loan to fund a new product launch), or external growth using internal finance (e.g. using retained profit to fund a takeover). Keep the two concepts clearly separated in your answers.