GROWTH AND EVOLUTION INTERNAL AND EXTERNAL GROWTH

« 1.5: GROWTH AND EVOLUTION INTERNAL AND EXTERNAL GROWTH SUCCESS CRITERIA The learning outcomes (or assessment objectives) for this section of the syllabus are: • The difference between internal and external growth (AO2) • Reasons for businesses to grow (AO3) • Reasons for businesses to stay small (AO3) • External growth methods (AO3) INTERNAL VS EXTERNAL GROWTH ▸ This section of the IB Business Management syllabus examines the growth and evolution of business organizations. ▸ Almost all businesses strive to grow, whether this is measured in terms of sales revenue, profits, number of stores/outlets, number of employees, number of customers, or market share. ▸ An example of business growth is Starbucks, which opened as a single coffee store in Seattle, USA in 1971.

By the end of 2021, Starbucks had more than 33,800 stores in 80 countries.

More than half of their outlets are located outside of the United States. ▸ Businesses often have to evolve their practices and/or products in order to survive INTERNAL GROWTH ▸ Internal growth (also known as organic growth) takes place when an organization expands without the help of an external partner firm. ▸ Instead, it uses its own resources to do so, such as using retained profits to invest in production facilities in new locations. ▸ Large companies can also sell shares on a public stock exchange to raise finance for expansion, whilst new companies can raise share capital (to fund business growth) from an initial public offering (IPO) on the stock exchange. INTERNAL GROWTH ▸ Organic growth, or natural growth, comes about from increased sales revenues and higher profits, with retained profits being reinvested in the organization. ▸ Using bank loans to finance expansion of the organization is still considered as internal growth as the bank is a third party, rather than a partner organization in the pursuit of growth. ▸ Business organizations pursue internal growth for several reasons, including: ▸ To foster brand awareness and brand loyalty ▸ To increase market share ▸ To maintain its corporate culture ▸ To maintain ownership and control of the organization ▸ To avoid the comparatively high expenses and risks associated with external growth. INTERNAL GROWTH RISKS ▸ However, due to the relatively finite resources available for internal growth, it often takes far longer to materialize than with methods of external growth. ▸ In some cases, organic growth can even lead to diseconomies of scale caused by inefficiency and coordination problems of being too large. EXTERNAL GROWTH ▸ External growth (also known as inorganic growth) takes place when an organization needs the support of a partner organizations for growth. ▸ For example, McDonald’s uses franchisees who buy McDonald’s restaurants and operate using the franchisee’s brands and products. ▸ The franchisee pays for this, helping McDonald’s to grow through partner businesses. ▸ Business organizations pursue external growth for several reasons, including: ▸ To grow at a faster pace ▸ To diversify their product portfolio ▸ To gain market share ▸ To gain customers in new and existing markets ▸ To reduce competition in the industry. EXTERNAL GROWTH RISKS ▸ External growth is usually faster than internal growth, but also more expensive to execute (especially in the cases of mergers and acquisitions). ▸ Inorganic growth typically requires external sources of finance, and also involves a lot of bureaucracy. ▸ Gaining trust from partner companies can be another hurdle for achieving inorganic growth. ▸ It also carries significantly more risks, such as organizational culture clashes and diseconomies of scale due to the inefficiencies created by the larger organization. Exam Practice Question - STC Manufacturing Exam Practice Question - STC Manufacturing Exam Practice Question - STC Manufacturing REASONS FOR A BUSINESS TO GROW ➢Some big reasons that incentives a business to grow include but are not limited to: ▸ Economies of Scale ▸ Sources of Finance ▸ Recruitment and Retention of Employees ▸ Brand Awareness ▸ Spreading Risk REASONS FOR A BUSINESS TO STAY SMALL ➢Reasons for a business to stay small include but are not limited to: ▸ Privacy ▸ Ownership and Control + Autonomy ▸ Specialization and Attention to a Niche ▸ Ease of Maintenance and Operation Exam Practice Question - Reasons to Grow or Stay Small Exam Practice Question - Reasons to Grow or Stay Small Exam Practice Question - Reasons to Grow or Stay Small THE EXTERNAL GROWTH METHODS WE WILL COVER 1.

Mergers & Acquisitions 2.

Takeovers 3.

Strategic Alliance 4.

Franchising 5.

Joint Venture OPTION #1: MERGERS & ACQUISITIONS ▸ An acquisition involves one company buying.... »