Skip to main content

Organic, or 'internal' growth.

 

Organic, or ‘internal’ growth comes from within a business and should be mentioned alongside economies of scale (which are different) when you are discussing the way in which businesses can grow. Economies of scale allow one to reduce long run average cost to the minimum point and keep it there across a range of output because of the size of the business. Organic growth is one way you get that increase in size.

A business can grow organically in a number of ways. It can expand its product range for instance, or enter new markets, or take on new shops and geographical areas. In doing this it runs the risk of getting too big too quickly, and suffering from diseconomies of scale, from rising AC and lower AR. Increasing productivity would allow a business to increase output by using technology better, or getting more out of its workers, leading to more output and sales value for the same or less factor cost.

As you can see from this link, organic growth might be preferable to taking over existing businesses, and can be financed by retained profits. This is true for Ltd or plc companies. Often, however, businesses combine the effort to retain profit and to put the retained amount into the business with loans based on projections of future growth. This can go wrong—look at Tesco in America, for instance.

https://www.tutor2u.net/business/reference/organic-internal-growth

To hedge against the risks of internal growth, many businesses, especially in the food service industry, now use a franchise system. This essentially places the risk on someone else. The main business licenses another, which bears risks, to use its logo, recipes, and materials, and only those. It also ties the franchisee into regular payments for these privileges.

The franchisee is then left to use the money left over to pay for staff and business costs, and keeps anything left over after bills and taxes. If the Franchisor then chooses to grant another franchise nearby, there is little that the franchisee can do; and nor can they offer their own independent products.

For all of this, even the biggest businesses can eventually reach a point where their costs are rising, or their revenues are falling. They can hold this moment off by innovation, advertising, and business strategy, and by more dubious methods such as restrictive practices (forcing franchisees to use only the business’ own engineers and charging them, as McDonalds was lately caught doing, when the machines McDonalds force franchisees to use go wrong, for instance.) The fate of most businesses is that of monopolistic, or imperfect competition, however.

Towards the end of their existence, businesses therefore can be found investing in external growth—buying other companies, or diversifying out of original markets. This may work as a strategy for some time (it has recently for Disney, for instance,) but it is still only really postponing the moment when the business will either have to retreat, break up, or leave a market,

Labels:

Comments

Post a Comment

Popular posts from this blog

Domestic Demand, External Pressures, and Inflation

    Domestic Demand refers to the accumulated (that is, aggregate) demand within all the markets of an economy. As such, it can be handily summed up in a formula, C+I+G+X-M, where C is consumption, I is investment, G is net government spending, and X-M is net exports. This is usually referred to as ‘AD.’ Consumption is the largest part of AD. All the consumption decisions within the economy, including all non-investment purchases by households, individuals, and firms, add up to around two thirds of AD. In addition, the Keynesian economic theory asserts that there is a link between consumption and investment, which can drive AD upwards, as firms invest more when they see that consumers are purchasing more goods and services. Investment is a sustained addition to long-run aggregate supply, or capital for short. AD can be plotted against LRAS on a two-dimensional graph. If AD and LRAS meet at the point where there is maximum real GDP/GNI with no tendency for the price level to rise, t
Post a Comment
Read more

Understanding the Balance of Payments

The balance of payments is the measure of all economic transactions between an economy and the rest of the world. As such, it covers the whole economy and should not be confused with the Government Budget. The balance of payments must always balance and if there is a deficit or surplus in goods, services, or some other component of the balance, it will be met with an equal change in the value of money or other asset. In a free exchange market, for instance, the currency of the country will adjust to alter living standards and the source of any surplus or deficit. The balance of payments consists of a current account, known as the balance of trade , a financial account , and a capital account. The current account is a record of net exports, plus income from abroad and direct transfers into a country. Many countries, particularly in the English-speaking world, run a deficit on this current account, because consumers and businesses purchase more imports than exports. This may well
Post a Comment
Read more

Higher Energy Prices and The Economy

  Energy prices are a basic cost. They are semi-variable for most businesses, in that a basic fixed cost of energy is generated by the need to heat or to cool buildings, and to carry out operations. In addition, a marginal cost exists for producers in terms of the energy required to increase production. Finally, energy costs are also built into the transport of raw materials, and the distribution of finished goods and services, which again contribute to marginal costs. If global energy prices are rising wholesale, it is unlikely that businesses or individuals will be able to lower the retail cost of energy by switching between suppliers. Energy storage is expensive and encourages economies of scale and oligopolies, in which consumer choice is limited at times of higher wholesale prices. When energy prices are low, smaller companies can purchase wholesale and make money at the margin undercutting bigger companies as storage costs will be a burden for the latter and the small companies
Post a Comment
Read more