Businesses grow for a number of reasons including to take advantage of a gap in the market, to gain a competitive advantage over rivals, and to win increased market share.
There are two main types of business growth:
1. Internal or organic growth.
2. External growth involving merger and acquisition.
Internal growth is typically a slower process, and can be financed by asking shareholders to contribute more capital, or by ploughing back profits into the business. The main disadvantage of such an approach is that it takes time, and in the meantime rivals may be expanding and gaining competitive advantage. However, the main advantage is that the business is able to maintain a healthy gearing position. Because it is not building up external debts (requiring interest repayments) it is better placed to maintain solvent growth. In addition ownership and control of the business is more likely to be retained by the existing shareholders. Many of the leading UK companies such as Cadbury Schweppes and Portakabin owe much of their early growth to internal growth, where through hard work and careful planning the original owners were able to grow their businesses successfully.
External growth can be carried out by seeking external finance, or by merger and acquisition. These approaches tend to rely on bringing external finance into the business in order to fund expansion, and therefore can lead to a deteriorating gearing position.
Merging with another company is a mutual arrangement whereby two companies join together. Typically one company will issue shares in exchange for shares in another company.
A take-over occurs when one business acquires a controlling interest in another. Typically this involves purchasing at least 50% of the shares in the company being taken over.
External growth enables fast expansion of a business but there are a number of problems. Where two companies come together, the cultures may be quite different and difficult to match up. In addition there may be disagreements between managers who are used to working with different practices and systems. The business change needs to be handled carefully from the human resource management perspective.