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Internal growth, or organic growth, occurs when a business decides to expand its own activities by launching new products and/or entering new markets. Businesses do this in order to improve their chances of increasing their customers, revenues and profits.

Internal growth is slower than external growth, but the business is in control at all times.

Franchising

Franchising is when one business sells the right to another to use its name, logo and to sell its products.

A franchisor sells a franchise in return for a fee and royalties. A franchisee is someone who purchases a franchise and is able to use an established brand name and their products.

Selling a franchise has many advantages, including:

• faster growth – stores can be opened faster than if the original business was opening them
• economies of scale – the business can achieve cost savings by expanding
• more profits – the franchisor gets an initial fee and a percentage of the profit that each store makes
• more motivated staff – each store owner will be running their own business and keeping the majority of the profit meaning they are more motivated that if they were just the manager of the store

Selling a franchise can have disadvantages, such as losing control of the business and the risk that one store could damage the reputation of the whole brand.

Buying a franchise gives the franchisee the right to use an established brand as well as training from the franchisor, shared marketing costs and access to a network of other franchisees.

However, franchisees must pay high set up fees and also share their profits (in the form of royalties). They will have less freedom to make decisions about what they sell and how much they sell them for.

Opening new stores

Another method of internal growth is opening new stores. This can be nationally or internationally. This is a fairly low risk option as long as the business finds a suitable location and has the finance available to afford it.

E-commerce

E-commerce involves the buying and selling of products online. This is another method of internal growth. There are businesses which traditionally only had physical stores (such as Marks and Spencer, Argos and John Lewis), which now have all established successful online stores. This can increase the size of the market, however, it will cost the business to set up and update.

Outsourcing

Outsourcing occurs when a business pays another firm to produce its products. This allows the business to increase its capacity quickly with very little investment. For example, a cereal manufacturer could meet an increase in demand by asking another cereal manufacturer to produce their products. However, the business will not have as much control and their reputation could be damaged if the products aren’t the same quality.

The advantages and disadvantages of internal (organic) growth

Advantages of internal growth include:

• it is relatively low risk
• a business can maintain its own values without interference from stakeholders
• higher production means the business can benefit from economies of scale and lower average costs

Disadvantages of internal growth include:

• it is relatively slow
• there maybe be a long period between investment and return on investment
• growth may be limited and is dependent on the reliability of sales forecasts