Advantages and Disadvantages of Internal Growth

Disadvantage

A need to restructure - Although a sole trader can control and coordinate the business quite easily, if it grows into a multinational company then the organizational structure has to be changed. Restructuring requires time, effort and money, e.g. it requires training and updating of skills. Specialist managers have to be hired as the firm and its workforce grows.

Advantage

Better control and coordination It is often easier to grow internally than to rely on external sources. Organic growth also means the firm maintains control, whereas external growth can lead to a loss of control and ownership of the business.

Disadvantage

Dilution of control and ownership - If a firm grows by changing its legal status, for example from a partnership to a public limited company, then the original owners (the partners) have to share decision-making with the new owners (the shareholders). With more owners, decision-making is prolonged.

Disadvantage

Diseconomies of scale Higher unit costs of production can arise from internal growth. Hierarchical structures tend to be a feature of internal growth, causing communication problems and slower decision-making as a business growth.

Advantage

Less risky Due to the above reasons, internal growth is the easiest and least risky method of growth and evaluation for most businesses. Furthermore, internal growth builds on the strengths of the firm, e.g. its brand and customer loyalty.

Advantage

Maintain corporate culture A major problem for mergers and acquisitions occurs when two firms with potentially very different cultures form a new company. By contrast, internal growth means there are no problems related with culture clashes and conflicting management styles.

Advantage

Relatively inexpensive The main source of organic growth is retained profits. There might also be a need to raise interest-bearing capital, but there is less risk with internal growth as the amount of capital involved is relatively lower. The higher cost of external growth means that for many firms internal growth is the only suitable method of growth.

Disadvantage

Slower Growth - Internal growth is slower than external growth. Despite the risks, shareholders may prefer more rapid methods of growth to boost their return on investment.