Types of Business Growth and 5 Reasons why Businesses Grow
There are two main types of business growth and they are; internal growth and external growth.
A) The Internal Growth
Internal growth is typically a steady process of expansion from within the firm. The owners of the business contribute more capital, or plough back profits into the business to acquire new assets, employ more staff, build additional plant or deploy new technology.
The main advantage of this approach is that the business can leverage its assets and experience over time. The main disadvantage is that it takes time, and rivals may be expanding and gaining a competitive advantage as well.
B) The External Growth
External growth can be carried out by seeking external finance, or by merger and acquisition. These approaches tend to rely on bringing external resources into the business in order to fund expansion.
In this case, there is the possibility of changes in the ownership structure of the firm or changes in its gearing position.
5 Reasons why Businesses Grow
There are many reasons that help to explain the motivations for businesses to grow
1. Profit Motive
Businesses grow to achieve higher profits and provide better returns for shareholders.
The stock market valuation of a firm is influenced by expectations of future sales and profit streams so if a company achieves disappointing growth figures, this can be reflected in a fall in the share price.
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This opens up the risk of a hostile takeover and also makes it more expensive for a quoted company to raise fresh capital by issuing new shares.
2. Cost Motive
Economies of scale in the long run increase the productive capacity of the business leading to lower average costs. They help to raise profit margins at a given market price
3. Market Power Motive
Firms may wish to increase market dominance giving them increased pricing power.
This market power can be used as a barrier to the entry of new businesses in the long run.
Larger businesses can build and take advantage of buying power (monopsony power).
4. Risk Motive
Growth might be motivated by a desire to diversify production and/or sales so that falling sales in one market might be compensated by stronger demand in another sector.
This is known as achieving economies of scope and is a feature of conglomerates.
5. Managerial Motives
Behavioral theories of the firm predict that business expansion might be accelerated by senior and middle managers whose objectives differ from major shareholders.
In summary, to be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts.
A company’s net profit is the revenue after all the expenses related to the manufacture, production and selling of products are deducted.
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