GCSEBusinessEdexcelRevision Notes2. Building a Business2.1 Growing the Business2.1.1 Internal (Organic) Business Growth

Internal (Organic) Business Growth (Edexcel GCSE Business)

Revision Note

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Steve Vorster

Expertise

Economics & Business Subject Lead

Reasons to Grow

  • Many firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)
     

Reasons why Businesses grow

  • Owners/Shareholders/Managers desire to run a large business & continually seek to grow it

  • Owners/shareholders desire higher levels of market share and profitability

  • The desire for stronger market power (monopoly) over its customers and suppliers

  • Desire to reduce costs by benefitting from lower unit costs as output increases e.g suppliers offer bulk order discounts

  • Growth provides opportunities for product diversification

  • Larger firms often have easier access to finance 

 

  • Business growth can be achieved by growing organically, or inorganically (mergers and takeovers)

Exam Tip

One of the goals of growth is to improve profitability. It's important to remember the distinction between profit and profitability.

Profit is the absolute amount of money a company makes, while profitability is a measure of how efficiently a company generates profit relative to its revenue or investment.

Profitability is usually expressed as a percentage and is calculated by dividing the profit by the revenue (net profit margin and gross profit margin).

  • Retrenchment involves a business scaling down its operations as it evolves and can involve
    • Reducing the size of the workforce
    • Closing less profitable outlets
    • Exiting existing markets

  • Retrenchment can help a business to reduce costs and is particularly relevant for businesses whose objective is to survive

Internal (Organic) Business Growth

  • Organic growth is growth that is driven by internal expansion using reinvested profits or loans
     
  • Organic growth (internal) is usually generated by
    • Gaining a greater market share
    • Product diversification
    • Opening a new store
    • International expansion (new markets)
    • Investing in new technology/production machinery
       

Examples of Organic Growth


Business
Example

Apple

  • International Expansion (new markets)
    Apple expanded into new markets by opening its stores in new countries, such as China and India, and by partnering with telecom providers to sell its products. This helped them to organically increase their market share, sales revenue and profitability

Google

  • Product Innovation
    Google introduced new products such as Google Drive and Google Maps to complement its search engine and advertising businesses. This helped them to organically increase their market penetration, sales revenue and profitability

Disney

  • Product Diversification
    Disney has diversified into several areas such as theme parks, cruise lines, television networks, and movie studios. The brand strength has helped them to organically increase market penetration in each of these markets resulting in higher sales revenue and profitability


 

  • Product diversification opens up new revenue streams for a business
    • Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream
       
  • Firms will often grow organically to the point where they are in a financial position to integrate (merge or buy) with others
    • Integration speeds up growth but also creates new challenges
       

An Explanation of the Advantages & Disadvantages of Internal (Organic) Growth


Advantages
Disadvantages

  • The pace of growth is manageable
  • Less risky as growth is financed by profits and there is existing business expertise in the industry
  • The management knows & understands every part of the business

  • The pace of growth can be slow and frustrating
  • Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to
  • Access to finance may be limited

 

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    Steve Vorster

    Author: Steve Vorster

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.