External Growth

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 the purchase of 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 in the way the ownership changes. In mergers & acquisitions, the ownership between the companies gets exchanged, while in a strategic alliance, businesses are able to 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 in order 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 level of competency and ability of the combined companies.

Recommended Articles

This has been a guide to External Growth and its definition. Here we discuss strategies, business, and uses of external growth along with advantages and disadvantages. You may learn more about financing from the following articles –