Business Growth Strategies: Internal and External Methods

Internal and External Business Growth Strategies

Growth is a natural goal for all companies, regardless of their initial size. The reasons for seeking expansion are varied, such as the attainment of economies of scale, since increasing production can lower costs per unit, allow for a better division of labor, and optimize machine capacity. Furthermore, larger businesses often secure better prices from suppliers, increase their sales volume, and improve their chances of obtaining funding.

There are two primary paths to expansion:

• Internal growth: Making new investments within the company to increase its production capacity.
• External growth: Involving the acquisition, participation, or control of existing businesses. This latter type usually occurs when a company has already reached a significant size through domestic growth.

Forms of Internal Growth

Specialization in Products and Markets

• Market Penetration: Increasing the corporation's share in current markets with existing products.
• Market Development: Introducing the company's existing products into new markets.

Diversification of Products and Markets

• Horizontal or Related Diversification: Developing the company through the creation of improved or new related products.
• Vertical Diversification: Offering a large supply of products that are complementary to the principal ones.
• Unrelated Diversification: Growing by developing new products that have nothing to do with the company's current offerings.

Forms of External Growth

External growth typically begins with the acquisition of companies engaged in similar activities. Common methods include:

• Merger: A legal procedure for company concentration involving the dissolution of two or more companies, which transfer their respective assets to a newly created entity.
• Absorption: A concentration procedure where one company (the absorbent) purchases the assets of another (the absorbed) and integrates them into its own structure.
• Participation: Occurs when a company buys shares in another. This can result in majority control (over 50% of shares) or minority control (less than 50%).
• Partnership and Cooperation: Using legal formulas or explicit agreements between different companies to combine efforts and reap mutual benefits. A common modern example is franchising.