external growth

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The means by which a business can grow by merger, takeover, or joint ventures, rather than by growing organically through its own internal development (see business strategy). External growth is widely used by companies as it can offer greater speed in achieving its corporate objectives than internal development. Typically firms can increase their market share by merging with or taking over a competitor in the same field (horizontal diversification). In mature or declining markets, restructuring of combined operations can lead to cost savings. Alternatively, a company may seek to gain greater control of its supply chain by expanding through merging or taking over a supplier or distributor (vertical integration). Unrelated external expansion may take place when a firm buys into a market in which it has no existing expertise; often the time taken to develop a significant presence on its own account is considered to be too long and risky, compared to buying an established business. Although great benefits may accrue from external growth, it also carries high risks, since the expected gains may often be slow to appear as a result of the restructuring and organizational changes involved as well as the high costs of financing the merger or takeover. Joint ventures, often between rival firms, sometimes between companies from different countries, are becoming a more common form of external growth. In such cases, the parties bring complementary strengths (technology, operations, marketing) and share the risks of the venture, although differences in company and country culture may cause difficulties.

Subjects: Financial Institutions and Services.

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