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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,

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