Business growth (Edexcel GCSE Business): Revision Notes
Business growth
What is business growth?
When a company becomes established and starts performing well, most business owners aim to expand their operations. Growth happens when a company increases its sales output over time.
Business owners pursue growth for several important reasons:
- It helps companies gain a larger share of their market
- It can reduce costs through economies of scale
- It typically results in higher profits
Understanding the different approaches to growth is crucial for any business student studying how companies expand.
Business growth is not just about getting bigger - it's about strategic expansion that creates value for the company, its customers, and stakeholders.
Internal growth (organic growth)
Internal growth refers to expansion that comes from within the company itself. This happens when businesses develop new offerings or enter different markets using their own resources and capabilities.
This type of growth is often called "organic" because it develops naturally from the company's existing operations, much like a plant growing from its own roots.
Methods of internal growth
Entering new markets Companies can expand by changing their marketing approach to reach different customer groups or by expanding into overseas territories. For example, a UK restaurant chain might start opening branches in France or Germany.
Market expansion can be geographical (new locations) or demographic (new customer segments). Both approaches allow companies to leverage their existing products and expertise in new contexts.
Developing new products This involves either improving existing products and services or creating completely new offerings that aren't currently available in the market. Innovation plays a key role here, whether through research and development or by enhancing current product lines.
Adopting new technology Larger organisations particularly benefit from investing in cutting-edge technology or developing new technological capabilities themselves. This can improve efficiency, reduce costs, or enable new ways of serving customers.
Internal growth typically takes longer than external growth but allows companies to maintain full control over their expansion and preserve their company culture.
External growth (inorganic growth)
External growth provides a quicker route to expansion by combining forces with other businesses. Unlike internal growth, this approach involves working with or acquiring other companies rather than growing independently.
Two main approaches to external growth
Mergers A merger occurs when two or more companies voluntarily decide to combine their operations and work together as a single business entity. Both companies agree to this arrangement and typically combine their resources, staff, and operations.
Takeovers A takeover happens when one company purchases another company. The acquiring business must gain control by purchasing enough shares in the target company. Unlike mergers, takeovers don't require the agreement of both parties.
The key difference: mergers are voluntary agreements between companies, while takeovers can be hostile if the target company doesn't want to be acquired.
Types of external growth
Backward vertical integration This occurs when a company joins with a business that operates at an earlier stage in the production process. For example, a car manufacturer might acquire a steel supplier.
Forward vertical integration This involves joining with a company that operates at a later stage in the production process. Using the same example, a car manufacturer might acquire a car dealership network.
Horizontal integration This happens when companies operating at the same stage of production combine their operations. For instance, two competing smartphone manufacturers joining forces.
Conglomerate mergers These involve businesses that have no common business interests or connections. The companies operate in completely different industries or sectors.
Each type of integration serves different strategic purposes:
- Vertical integration helps control supply chains
- Horizontal integration reduces competition and increases market share
- Conglomerate mergers spread risk across different industries
Real-world application
Case Study: Tesco's Growth Strategy
Consider why major UK retailers like Tesco have grown through both internal and external methods:
Internal Growth:
- Developed new product ranges (like their F&F clothing line)
- Entered new markets by expanding internationally
- Invested in online shopping technology and delivery services
External Growth:
- Acquired smaller retail chains to increase market presence
- Purchased specialist retailers to enter new market segments
- Merged with or took over competitors to consolidate market position
This dual approach allowed Tesco to become one of the UK's largest retailers while diversifying their offerings and geographic reach.
Key Points to Remember:
- Business growth means increasing sales output over time and can lead to higher market share, lower costs, and greater profits
- Internal growth happens when companies expand using their own resources through new markets, products, or technology
- External growth occurs when businesses combine with others through mergers (voluntary joining) or takeovers (purchasing control)
- External growth can be vertical (joining suppliers or customers), horizontal (joining competitors), or conglomerate (joining unrelated businesses)
- Both growth methods have advantages - internal growth maintains control while external growth can be faster