Organic Growth

Key Terms
Organic Growth: Expansion of a firm's operations from it's own internally generated resources.

Market Share: Percentage of the total market held by firm.

Market Power: When a firm has the ability to exert significant influence over quantity of goods traded or the price at which they are sold.
Theory

What is Organic Growth?


Organic growth also known as internal growth occurs when a business expands existing operations. This process requires the use of profits or loans to finance expansion by increasing fixed + variable factors. Innovation and creativity is central to organic growth.

Two ways organic growth can occur:

1) Extending firms geographic reach
2) Expanding into new products to increase size of available market


Why do firms seek to grow?

  • Profit motive
  • Cost motive
  • Market power motive
  • Risk motive
  • Managerial motive


    • Examples of Organic Growth

    Subway

  • In 2001, subway had 52 franchises in U.K
  • It currently has approximately 1,500 franchises in the U.K


    • Apple

  • Formed in 1977, Apple has grown strongly due to constant focus on innovation of products
    • Advantages of Organic Growth
    1) Safer than external growth

    Unlike external growth, organic growth is:

  • Easier to control
  • Can be better planned
  • Financed through internal funds (reinvested profit)


    • 2) Maintains existing company culture and management style

    In a merger or aquisition company culture can be seriously affected by the sudden imposition of new management styles leading to a loss of productivity.

    Organic growth maintains company culture ensuring that productivity is not lost to sudden changes in company dynamics.
    Disadvantages of Organic Growth
    1) Slow process

    The process of saving and reinvesting profits is slow. This is not preferable to shareholders.


    2) Depending on level of competition increasing market share may be difficult


    3) Potential for diseconomies

    If organic growth involves franchising and the opening of more branches, the firm could face diseconomies of scale.









    ↑