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Internal and external growth AO2 only

AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest

Firms are rather like shellfish; they are constrained by their shells. To go on growing they have to shed the old one and grow a larger, new one. So, many things have to adapt and change as size grows beyond a certain critical size. For shellfish it is the shell, for a firm it is the way that it is organised. This is why many companies seem to grow in a cyclic manner.


Figure 1 Growth of a firm

Growth is often split into two types - internal and external. These can be defined as follows:

Internal growth

Internal growth is where a firm gets larger from expanding by using its own resources. This is often known as organic (natural) growth. Growth generates increased sales and higher profits, which are then reinvested in the business.

External growth

External growth is when a firm grows by taking over or merging with another firm (integration). This is often known as inorganic growth.