Internal vs. External Growth Strategies

Internal Growth Strategies

Internal growth strategies are methods by which an organization can expand its operations and achieve growth from within without relying on external methods like mergers and acquisitions. It focuses on leveraging its resources, abilities, and existing market presence.

Here are some key internal growth strategies:

Market Penetration: This involves selling more existing products or services to current customers, often through increased marketing efforts or promotional activities. Market Penetration Strategy: Tactics | Examples | Formula
Market Development: This strategy involves finding new markets for existing products or services. This could include geographic expansion, targeting new customer segments, or exploring new distribution channels. Market Development Strategies: Step-by-step guide with examples
Product Development: An organization develops new products or services for its current markets. This often requires investment in research and development. Product Development Strategy
Innovation: This strategy involves creating new products, services, or technologies to open new markets or provide a competitive advantage. Innovation Strategies: Explained with examples and framework
Process Improvement: Improving the efficiency or effectiveness of organizational processes can lead to cost savings, improved quality, faster delivery times, or other benefits that can drive growth.
Customer Experience and Retention: An organization can increase customer loyalty and repeat business by improving customer service. This can be achieved through better after-sales service, loyalty programs, etc.
Human Capital Development: Investing in employee development and creating a high-performance work culture can lead to greater productivity, innovation, and service quality, all of which can drive growth.
Strategic Investments in Assets: This includes acquiring new machinery, technology, or infrastructure to increase production capacity, efficiency, or market reach.

It’s important to note that any organization’s right internal growth strategy will depend on various factors, including its industry, competitive landscape, current market position, and internal capabilities and resources.

Examples of internal growth strategies

Here are examples of each type of internal growth strategy:

Market Penetration: A supermarket chain decides to stay open 24 hours to attract more business from existing customers. Alternatively, a software company might launch an intensive marketing campaign to encourage current users to upgrade to a premium version.
Market Development: A clothing retailer that traditionally serves urban markets could decide to expand into rural areas. Or a U.S.-based company might start exporting its products to Europe or Asia.
Product Development: An electronics manufacturer might decide to use its expertise in audio technology to develop a new line of high-end headphones for its existing customer base. A food company might develop a new line of gluten-free products to cater to the health-conscious segment of its existing market.
Innovation: Apple created the iPhone, an innovative product that created a whole new market. Tesla is another example of their development and promotion of electric vehicles.
Process Improvement: An auto manufacturer might invest in new assembly line technology to reduce production time and costs. A software company might implement new project management methodologies to reduce the time it takes to bring new software to market.
Customer Experience and Retention: Amazon has a history of focusing on customer experience, from their easy return policy to their development of Amazon Prime for faster shipping and other benefits. These strategies improve customer retention and encourage customers to spend more.
Human Capital Development: Google is known for its employee development programs, providing training, offering free time for personal projects, and maintaining a work culture that encourages innovation. These strategies help to attract and retain top talent, which drives long-term growth.
Strategic Investments in Assets: A transportation company might invest in a new fleet of more fuel-efficient and reliable trucks. A manufacturing company might buy a new factory to increase production capacity.

Remember, a company’s strategies should align with its overall strategic goals, considering its industry, competition, and market conditions.

How can an organization develop internal growth strategies?

Developing internal growth strategies involves several steps. An organization must evaluate its current situation, establish its objectives, and devise strategies to achieve them. Here’s a step-by-step process:

Assess the Current Situation: The organization should conduct an internal analysis to understand its strengths and weaknesses. This includes an evaluation of its resources, capabilities, and current strategies. It should also conduct an external analysis to understand the market trends, competition, and opportunities in the business environment.
Set Objectives: The organization should define clear growth objectives based on its assessment. These objectives could be related to increasing market share, expanding customer base, entering new markets, increasing revenue or profits, etc. The objectives should be SMART (Specific, Measurable, Achievable, Relevant, Time-bound).
Identify Opportunities: The organization should identify growth opportunities that align with its objectives and capabilities. This could involve market penetration, product development, innovation, process improvements, customer retention, human capital development, or strategic asset investments.
Develop Strategies: Once the opportunities are identified, the organization should develop strategies to exploit them. For example, if the opportunity is market development, the strategy could be geographic expansion, targeting new customer segments, or using new distribution channels.
Implement Strategies: Implement the strategies by mobilizing resources, training staff, and adjusting organizational structures and processes if necessary. Clear roles and responsibilities should be defined for implementation.
Monitor and Evaluate: Regularly monitor the progress of the strategies and evaluate their success in achieving the growth objectives. Use key performance indicators (KPIs) to measure performance. Adjust the strategies as necessary based on the evaluation.

This is a cyclic process. The organization should constantly assess its situation, set new objectives, identify opportunities, develop strategies, implement them, and monitor and evaluate. This continuous strategic management process helps the organization to adapt to changes in the business environment and achieve sustainable growth.

Remember, strategy development should involve key stakeholders, including top management, employees, customers, and even suppliers. Input from these stakeholders can provide valuable insights and help ensure the strategies’ success.

External Growth Strategies

External growth strategies, also known as inorganic growth strategies, involve expanding a company’s operations by collaborating with or acquiring outside organizations. These strategies are typically faster ways to grow than internal growth strategies, as they can quickly increase a company’s market share, diversify its product offerings, or expand into new markets.

Here are some common external growth strategies:

Mergers and Acquisitions (M&A): Mergers occur when two companies combine to form a new entity, while acquisitions happen when one company purchases another. These strategies can help a company grow by gaining new technologies, resources, customer bases, or market access. Merger & Acquisition (M&A) Strategies Explained
Joint Ventures: In a joint venture, two or more companies collaborate on a specific business project or entity, sharing the costs, risks, and profits. This allows companies to leverage each other’s strengths, share resources, and expand their operations.
Strategic Alliances: Strategic alliances are agreements between two or more companies to cooperate for a specific purpose, such as developing a new product or entering a new market. Unlike joint ventures, strategic alliances don’t involve the formation of a new entity. Strategic Alliance: Meaning, Types & Examples
Franchising: Franchising allows a company to expand by granting other businesses the right to operate under its brand name in specific locations. This can enable rapid growth with less capital expenditure than setting up new company-owned locations.
Licensing: In a licensing agreement, a company (the licensor) grants another company (the licensee) the rights to use its technology, brand, design, or business model. This allows the licensor to generate revenue and expand its brand’s reach without establishing operations in new markets.

While external growth strategies can provide rapid growth and other benefits, they also carry risks. For example, mergers and acquisitions can lead to culture clashes, redundancies, and other integration challenges. Joint ventures and strategic alliances require careful management to ensure all parties benefit and to prevent conflicts of interest. Thus, companies must carefully consider these factors when choosing growth strategies.

Examples of external growth strategies

Here are some examples of external growth strategies:

Mergers and Acquisitions (M&A): One of the most famous examples is the acquisition of Pixar by Disney in 2006. Disney gained access to innovative animation technology and a talented team, leading to many successful movies. Another example is Google’s acquisition of Android in 2005, which formed the basis for Google’s entry into the mobile operating systems market.
Joint Ventures: An example is the joint venture between Starbucks and PepsiCo to market and distribute ready-to-drink coffee beverages. The North American Coffee Partnership venture leverages Starbucks’ expertise in coffee and PepsiCo’s extensive distribution network.
Strategic Alliances: An example of a strategic alliance is the partnership between Microsoft and Adobe, where they agreed to integrate their respective software suites to better compete against common rivals in the cloud computing market.
Franchising: McDonald’s is a prime example of a business that has grown enormously through franchising. By franchising its brand to local business owners, McDonald’s has rapidly expanded its global footprint. How does McDonald’s make money from the franchise business model?
Licensing: A great example of licensing is when fashion brands license their names to manufacturers of perfumes, eyewear, or other products. The fashion brand expands its product line and revenue without manufacturing these products.

Remember that while these strategies offer a faster way to grow, they also come with risks, such as potential conflicts between partners, difficulty integrating acquired companies, and risks to the company’s brand. So, any company considering these approaches should conduct thorough due diligence and carefully manage the implementation process.

How can an organization develop external growth strategies?

Developing external growth strategies involves several steps. The organization must understand its current situation, establish its objectives, identify opportunities for external growth, and formulate and implement strategies to exploit them. Here’s a step-by-step process:

Assess the Current Situation: The organization should conduct an internal analysis to understand its strengths, weaknesses, resources, capabilities, and current strategies. It should also conduct an external analysis to understand the business environment’s market trends, competition, opportunities, and threats.
Set Objectives: The organization should define clear growth objectives. These objectives could be related to increasing market share, diversifying product offerings, expanding into new markets, increasing revenue, etc.
Identify Opportunities: The organization should identify opportunities for external growth that align with its objectives. This could involve mergers, acquisitions, joint ventures, strategic alliances, franchising, or licensing.
Due Diligence: If the strategy involves M&A, joint ventures, or strategic alliances, the organization should conduct thorough due diligence on potential partners or targets. This involves assessing their financial performance, market reputation, culture, etc.
Develop Strategies: Once the opportunities are identified, the organization should develop strategies to exploit them. This could involve identifying acquisition targets, potential partners for joint ventures or alliances, franchising markets, or licensing technologies.
Negotiate and Structure the Deal: The organization should negotiate the terms of the deal, such as the purchase price for an acquisition, the terms of a joint venture or alliance agreement, or the royalties for a licensing agreement. The deal should be structured to align with the organization’s objectives and protect its interests.
Implement Strategies: Implement the strategies by executing the deal, integrating the acquired company, managing the joint venture or alliance, or launching the franchised or licensed products.
Monitor and Evaluate: Regularly monitor the performance of the external growth strategies and evaluate their success in achieving the growth objectives. Adjust the strategies as necessary based on the evaluation.

Remember, strategy development and implementation should involve key stakeholders, including top management, employees, customers, and even suppliers. Also, the organization may need external advice from consultants, lawyers, or financial advisors, especially when executing complex mergers and acquisitions.

Organic Vs. Inorganic Growth Strategy