How do Businesses Grow?5.3.1 Internal & External Business Growth

Learning Outcomes To understand the difference between

internal and external growth. To understand the main external means

of growth — acquisition, merger and takeover.

To understand some of the costs and benefits of both internal and external business growth.

Starter Either from your knowledge (we did it in

BTEC!) or from research, define what makes up the marketing mix)

Hint – think 4 Ps

How do we measure business size? Task 1

Using the internet, find out:- Which is the largest business in the UK Which is the largest business in the world

How did you come to that conclusion? What did you measure to identify how big they are?

How do you measure business size? The value of the business – This means how much

it would cost to purchase the business from it’s owns.

Market Share – The number of customers the business has as a percentage of the whole market.

How much revenue the business has – this measures the £s value of all the sales the business makes in a year.

The amount of profit the business has made – The money left once all the costs are taken away from revenue.

The value of assets owned by the business – Assets include buildings, machinery, equipment & cash. The value of these can be added together to calculate the business size.

How do you measure business size? Task 2 Research:- Which business has the highest value in the world? Which supermarket has the largest market share in

the UK? What is their market share? Which business has the most revenue in the world

last year? Which business made the most profit in the world

last year? Who owns the most land & property in the UK?

What is the value of these assets?

Types of Business Growth There are two ways in which a business

can grow. Internal Growth – This means that growth is

achieved as a result of it’s own actions or decisions, no other business is involved.

External Growth – This is the increase in business size as a result of purchasing one business and incorporating it into your own (a takeover) or when two business agree to join together (a merger)

Internal GrowthInternal growth normal involves making the business more appealing to customers. This can be done in a number of ways:- Improve the marketing mix to make either existing

customers purchase more frequently or attract new customers. This will mean increased revenue and probably increased profit and market share, therefore growth.

Innovation and research & development can lead to the business developing new products to steal a march on their competitors, such a Sky + HD which leads to more subscriptions and therefore business growth.

Internal growth is normally financed by reinvesting profits from previous years and can therefore be quite slow.

External GrowthExternal growth is when the size of a business is increased because it has joined forces with another. Unlike internal growth, external growth is sudden. This means that revenues, profits, market share and assets show an immediate leap. However, there are issues. Purchasing another business usually requires a

large amount of money, for example, Apple paid $3 billion for Beats. Usually, the only businesses that can afford to do that already have large sums available or have had sustained success for a number of years to enable them to persuade banks to lend them money.

There can often be problems bringing two businesses together. Often only one set of staff are needed for each job function so this can lead to in-fighting.

Conclusion Small businesses usually increase in size

through internal growth whereas larger businesses often have a choice in their strategy for growth. They may chose to grow steadily which can be more appealing to customers and staff and allows for greater control. However, they may decide to grow quickly using external growth and risk disagreements and loss of control.

Revision Essentials External Growth – an increase in business as

a result of a merger or takeover. Internal Growth – an increase in a business

size as a result of a business’s own actions or decisions.

Merger – where two businesses agree to join forces and begin trading as one.

Takeover – where one business purchases another and incorporates it into its own operation.

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