External growth

In other words, external or inorganic growth is a type of business growth that consists of the acquisition of another company as a means of growth. That is, it requires mergers and acquisitions of other companies to increase the volume of business.

Therefore, any company that acquires another company through a merger or acquisition (total or partial), is turning to what experts in the world of business economics call "external growth."

This growth is in contrast to "organic growth" or "internal growth." That is, growth motivated by the use of available resources that the company has, and not by the acquisition of new resources from another company.

We will see these two types of growth in depth in the next section.

Difference between external growth and internal growth

Thus, in this section we will focus on the difference between these two types of growth. External growth, together with internal growth, as we said before, are the two main types of business growth recognized by experts in the field.

On the one hand, external growth is that experienced by the company, the result of a merger or acquisition.

On the other hand, internal growth, in the business world, is that growth that has been motivated by the use of the available resources that the company has. That is, the growth that the company experiences as a result of a better use of resources, a readjustment in the supply chain, a reorganization of personnel, among other alternative strategies.

Therefore, the main difference between the two growths is that while internal growth is based on a strategy that allows the company’s resources to be used efficiently and effectively, external growth focuses on capital injection and acquisition of companies as a means to grow.

Advantages and disadvantages of external versus internal growth

Among the advantages and disadvantages that this type of growth offers compared to internal growth, we can highlight the following:

Advantages of external growth over internal growth

The advantages are as follows:

• Growth rate: The growth rate, when we resort to external growth, is faster than if we had resorted to internal or organic growth.
• Performance and expansion : When we talk about external growth, we must know that the performance that this growth can offer in the long term, and the expansion that the company experiences, can be more effective than if we only resort to internal growth to carry out said expansion.
• It requires more capital, but fewer resources : The high cost of this type of growth is due to the high cost of acquiring a company. However, once we have acquired it, getting it up and running is a matter of time. That is, growth comes without the need to intensify efforts as much as occurs in internal growth.

Disadvantages of external growth versus internal growth

The disadvantages are as follows:

• Higher risk : The potential losses are higher. Well, the cost of acquiring a company and subsequently failing could generate very serious problems within the company.
• Less sustainable growth : As capital intensive operations, growth is higher. However, no one has the capital to continually acquire companies. For this reason, such accelerated growth, with the passage of time, could become unsustainable and ends up moderating.
• It is usually more expensive : As we have said throughout the article, this type of growth is more expensive. Well, it requires large capital to acquire new companies.
• It can generate dependency and reduce autonomy : As these are companies that seek to grow by acquiring new companies, they have groups of private investors that could be financing this growth. These investors have very different interests, and in the long term there may be conflicts of interest that end up damaging the business.

Example of external growth

To finish, let’s look at a very clear example of external growth.

The banking sector, for example, is a sector that tends to use this type of growth to increase its size and turnover. Large banking corporations take over other smaller entities to strengthen their customer base and absorb their business volume.

In Spain, last year we could see this example in the merger of Bankia and Caixabank. Two entities that merged together to grow faster and be more robust in the micro and macroeconomic environment. This type of growth is sometimes also called a hybrid.

In summary, external growth is a mechanism to grow effective if the operation is analyzed well. Large banks often resort to it, but other entities such as Pepsico, Coca Cola, as well as other large multinationals have also done so to consolidate their presence in the market and their dominance.