Definition
External growth, also known as inorganic growth, is a strategy for business expansion that involves the company increasing its size, revenue or market presence through methods outside of its internal operations. This usually includes tactics like mergers, acquisitions, alliances with other companies, or purchasing other businesses. It’s a fast way for a company to scale up, as opposed to internal growth which emphasizes growing the business through its own resources and operations.
Key Takeaways
- External growth, also known as inorganic growth, is a strategic approach where a company increases its growth rate by acquiring or merging with other companies rather than relying on its internally generated growth.
- This type of growth can provide immediate access to new markets and customers, additional resources and capabilities, and can also improve a company’s competitive positioning. It is often a quicker way for a company to scale up compared to organic growth.
- However, it also carries risks including the challenge of integrating two different corporate cultures, negative reactions from stakeholders, and potential regulatory hurdles. It can also be quite costly and may result in a significant amount of debt.
Importance
External Growth, commonly understood as a business expansion strategy through acquisitions, mergers or strategic partnerships, holds paramount importance in finance due to several reasons. It’s viewed as an effective approach to improve a company’s financial performance and market position without the time and resources required for building those capacities internally.
This strategy can bring instant access to new markets, increase the company’s customer base, enhance product or service offerings, as well as diversify its operations or portfolio. Such growth can significantly enhance a company’s competitive advantages and facilitate faster growth.
External growth also presents opportunities for economies of scale, cost savings, and can lead to an increase in the company’s market share. Hence, understanding and executing external growth strategies is crucial for a company’s financial health and expansion plans.
Explanation
External growth, often achieved through mergers, acquisitions, or strategic alliances, is a popular business strategy employed by many corporations to attain a heightened market share, diversify their product offerings, or enter new markets. The main purpose of external growth is to provide a quick method for companies to scale up their operations, achieve economies of scale, or acquire valuable resources such as technology or human talent that would otherwise take a significant amount of time to develop internally.
This rapid expansion can lead to increased revenues and profits, generating greater returns for shareholders. In addition to speed, external growth also provides companies with the opportunity to manage their risks and challenges.
For instance, if a company enters a new market by acquiring a local firm, it mitigates its market-entry risks as the local firm already knows the market dynamics. Moreover, it may use this strategy to eliminate competition by acquiring a competitor, thus gaining access to its customer base and distribution networks.
Hence, external growth is an essential strategic alternative for firms looking to sustain a competitive edge and bolster their market presence.
Examples of External Growth
External growth, also known as inorganic growth, generally refers to the growth of a company that results from using external resources and capabilities rather than from internal business activities. It commonly happens through mergers and acquisitions, strategic alliances, or joint ventures. Here are three real-world examples:
Disney and 21st Century Fox: In March 2019, The Walt Disney Company completed its acquisition of 21st Century Fox. This was a significant example of external growth where Disney expanded its media networks, movie studio, content library, and direct-to-consumer platforms.
Microsoft Acquisition of LinkedIn: In December 2016, Microsoft completed its acquisition of LinkedIn, the world’s largest professional network. This was an example of external growth as Microsoft aimed to integrate LinkedIn’s network of professionals and job seekers to accelerate the growth of its business-oriented software and services.
Google’s Purchase of YouTube: In November of 2006, Google purchased YouTube for $
65 billion in stock. This allowed Google to grow externally by integrating YouTube’s large user base and vast video library into its own ad-serving and search platforms. This acquisition also helped Google immensely in stepping into the emerging online video market.
FAQs on External Growth
What is External Growth?
External growth, also referred to as inorganic growth, is when a business increases its size and business reach by acquiring new businesses or establishing partnerships with other companies. This is usually achieved through mergers, acquisitions, or partnerships.
What are the advantages of External Growth?
External growth offers numerous advantages. It provides companies with an opportunity to quickly increase their market share, diversify their operations, leverage economies of scale, and access new markets. Additionally, it can allow companies to acquire new technologies or capabilities that are difficult to develop in-house.
What are the disadvantages of External Growth?
While external growth presents several benefits, it also has some potential drawbacks. These include potential culture clashes with the acquired company, the challenge of integrating processes and systems, and the risks associated with investing in an unfamiliar market. Additionally, external growth often requires a significant amount of capital and can increase a company’s debt load.
What is the difference between External Growth and Internal Growth?
External growth is a strategy where a company grows by merging with or acquiring other companies. On the other hand, internal growth, also known as organic growth, involves a company expanding its operations through its existing business activities. This often includes increasing production, boosting sales, or expanding into new markets.
Are there different types of External Growth?
Yes, there are two main types of external growth: horizontal integration and vertical integration. Horizontal integration involves a company acquiring or merging with companies that are in the same line of business, while vertical integration involves a company acquiring businesses in its supply chain.
Related Entrepreneurship Terms
- Mergers and Acquisitions
- Joint Ventures
- Strategic Alliances
- Horizontal Integration
- Franchising
Sources for More Information
- Investopedia: This site is a world-leading source of educational content on finance and investing.
- The Balance: This finance focused website includes a vast amount of articles about various finance and business concepts, including External Growth.
- Financial Times: This UK-based international daily newspaper is focused on business and economic news, analysis and special reports.
- European Central Bank: As the central bank for the Eurozone, its webpage provides useful information about finance and economy operations across Europe, providing a global perspective on concepts like External Growth.
