0333 444 8522

Internal versus external growth: which should your business focus on?

By Richard Olsen

When growing a business, there are many routes you can take to achieve your goals and step up to that next level.

The key is finding a strategy that works. This means understanding the available options and identifying tactics that most suit your company.

When pursuing expansion, there are two directions: internal versus external. Each has its benefits and considerations.

We explore internal and external growth in more detail and how to decide which to focus on.

What is internal growth?

Internal growth – sometimes called organic – focuses on the resources within your business. You rely on your own processes and operations to scale the company.

Examples of internal growth include:

  • Expanding your operations to meet new demand and generate greater output
  • Increasing sales and customers, using internal processes like marketing
  • Hiring new staff
  • Adding more products and services to your offering
  • Incorporating new functions – such as marketing, sales, commercial operations and so on
  • Setting up branches in new locations

The benefits of internal growth

Internal growth works by making the most of what you already have, which allows the expansion to happen gradually and with sufficient demand to warrant it. This often makes for a smoother transition period, as your business naturally grows through the various tools such as marketing initiatives, new products, etc.

Key is ensuring that your operations are optimised and undergoing continuous improvement, this enables you to service your customers effectively whilst building a positive reputation in the industry. This will make it easier to manage costs through these efficient processes, bringing added advantages.

Essentially, it enables you to scale up when the time is right, without having to force it, and improves your chances of long-term success.

It also minimises the level of funding required, as your revenue and profit should enable you to scale up naturally (though some external finance may be necessary to improve cash flow and acquire the assets you need).

However, you will only get to this position if you pursue the right tactics, with a strong value proposition and processes that drive sales. It will be a longer process than inorganic growth as you begin to gather the resources you need to facilitate demand – such as new assets, premises, staff, etc.

What is external growth?

External (also known as inorganic) growth uses resources and capabilities outside your business.

The most common examples are:

  • Acquisitions – including management buy-ins and buy-outs
  • Mergers
  • Strategic partnerships

The benefits of external growth

The main advantage of external growth is it allows you to expand your business in one fell swoop by acquiring or merging with an existing company.

Any company you purchase will come with assets, customers, staff, contracts, suppliers and other resources. Depending on the agreement, you take control of these resources, which should enhance your operations and increase productivity. Increased assets will also improve your company’s value and make it easy to secure funding later.

You will acquire the company’s customers, which fuels demand and increases your market share.

However, the downside of external growth is that it requires significant investment. Acquiring an established business comes at a price, and you will likely need financial support.

It’s also essential to find companies that compliment your existing business and have patience during the transition period while you align the various parts of the company. It’s fundamental to do this well to optimise operations and guarantee success.

Which should I focus on?

There are rewards and limitations associated with internal and external growth, respectively.

While internal growth is an excellent indicator of performance, especially if it involves increasing sales and revenue, however you will get to a position where you cannot go much further without external growth – such as acquiring a competing company.

On the other hand, you need some form of organic success to complement external growth so that you are in a place to purchase another business and drive the growth of the combined businesses.

It’s, therefore, best to take a combined approach, which allows you to scale up as your sales and revenue organically grow until you reach a position to expand externally. While keeping your business operating and growing efficiently, and then accessing outside support and resources you need to level up.

Most crucially, it’s vital to choose growth tactics that work for you and your specific situation to maximise the likelihood of success.

UK Business Advisors support you in creating and implementing an efficient growth strategy for your business, driving the results you desire.

Richard Olsen | UK Business Advisors (ukba.co.uk)

Need advice & guidance?

We have advisors all over the UK. Get in touch today for expert guidance and support.