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.
