External Growth

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

External Growth Definition

External Growth refers to the inorganic growth strategy wherein a company uses external resources and capabilities, but not the available internal resources, to expand its business activities. This strategy results in an increase in sales and profitability through purchasing other companies or building a business relationship with them.

Strategies of External Growth

The strategies can be broadly classified into two primary vehicles: mergers & acquisitions and strategic alliances. The differentiating factor between the two strategies is how the ownership changes. In mergers & acquisitions, the ownership between the companies gets exchanged, while in a strategic alliance, businesses can retain their independence while pursuing their collective objectives.

External Growth

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Business

There are several reasons that businesses opt for external growth, and some of the major ones that drive this strategy are as follows:

Reasons of External Growth

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Uses

Some of the primary uses of this strategy are as follows:

  • It allows companies to access newer and bigger markets.
  • It helps companies to grow bog so that they can command more market power.
  • At times companies acquire another company to obtain access to noble technology or a stronger brand.
  • It facilitates product and service diversification.
  • It helps in increasing the operational efficiency of a business.

External Growth vs. Internal Growth

Advantages

Some of the advantages are as follows:

Disadvantages

Some of the disadvantages are as follows:

  • This strategy is quite expensive as compared to the internal growth strategy.
  • It results in a concentration of power in the hands of the few who may end up misusing it.
  • Merger and acquisition deals result in large-sized companies that may resort to monopoly.
  • The alliance may end up in a big failure if there is a vast difference in the combined companies’ level of competency and ability.

Recommended Articles

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