What are the tradeoffs (pros and cons) between internal and external growth strategy? Which approach is best as an international strategy?

Growth strategies attempt to expand company activities. This growth can be accomplished internally or externally.

Internal growth aims to achieve growth in sales, assets, profits or a combination of these efforts. A company can grow internally with increases in operations globally and domestically. This growth can be accomplished in many ways, including horizontal or vertical growth.

Internal growth can focus on the strengths and resources of a company that will help it produce growth and high annual returns on capital invested in the company. “The firm attempts to secure strategic fit in a new industry where the firm’s product knowledge, its manufacturing capabilities, and the marketing skills it used so effectively in the original industry can be put to good use.” (Hunger and Wheelen. 2008. Pg 170.)

Expanding growth into a new industry requires organization and the unification of various company resources for optimal results. For example, vertical growth, when used with a distinctive competency and to expand a competitive advantage along the industry value chain, can improve market position. However, it can also reduce a company’s strategic flexibility and focus.

Internal growth requires management to evaluate the current company strategic plan and consider options for the desired growth. They must evaluate the options available and consider various outcomes based on the growth potential. For example, “Transactional cost economies proposes that vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market becomes too great. When highly vertically integrated firms become excessively large and bureaucratic, however, the costs of managing the internal transactions may become greater than simply purchasing the needed goods externally.” (Hunger and Wheelen. 2008. Pg 167.)

External growth is designed for the same purposes as internal growth. However, it also involves gaining market share, international recognition, acquiring strengths to develop competitive advantages, and eliminating or dominating your competitors through acquisitions, mergers and strategic alliances.

“A properly executed external growth strategy can help you realize maximum growth potential at the right pace-particularly when internal growth opportunities are limited by financing or other constraints, or aren't the best choice in terms of strategic opportunities or shareholder objectives.” (Lucky, D. 2007. para. 1.)


In addition, the organizational structure and corporate culture can influence the success of this growth. If various SBUs (strategic business units) work against each other in a competitive nature, and fail to work together towards the goals of the corporation, achieving synergy will be ineffective and the results minimized.

External growth done through mergers, acquisitions and strategic alliances, provides opportunities to develop strengths and competencies an organization lacks but other organizations control. By gaining key resources and knowledge, a company can gain market share and competitive advantages in an industry. However, all external growth opportunities face uncertainty.

For example, there are significant inherent challenges in international external growth strategies. “Among the most important barriers to international trade are the different standards for products and services.” (Hunger and Wheelen. 2008. Pg 276.) In addition, companies face challenges in the ability to measure product demands based on the demographics of the market, different auditing and accounting practices, fluctuation among currency values and inflations, and unique marketing and manufacturing schemes inherent to a foreign country.

Joint ventures, the most popular form of strategic alliance, are extremely popular in international efforts because each corporation keeps its independence. However, they can encounter disadvantages that damage a company, such as loss of control, low profits, significant potential for conflict, and knowledge transfer from one company to the other.
“A key benefit of strategic alliances, partnering relationships and mergers is that they allow you to share risk and resources when entering a new market. These growth strategies also present the opportunity to develop more expertise, or take advantage of an existing strong management team with excess capacity. Appropriate growth strategies also address opportunities for diversification, realizing business synergies and achieving product rationalization. Note, however, that strategic alliances, partnering relationships and mergers also require you and the other party (or parties) to agree on mutual expectations and governance issues.” (Lucky, D. 2007. para. 8.)

In mergers within an industry, companies may combine a complimentary match of resources and competencies for competitive advantages. However, if the merged organizations have extremely different structures and cultures, they will unlikely be able to unify as one productive and efficient company.

“Research generally concludes, however, that firms growing through acquisitions do not perform financially as well as firms that grow through internal means.” (Hunger and Wheelen. 2008. Pg 175.)

“Over time, conflicts over objectives and control often develop among the partners. For these and other reasons, around half of all alliances (including international alliances) perform unsatisfactorily.” (Hunger and Wheelen. 2008. Pg 157.)

The best strategy for growth on an international basis appears to be determined by the corporation and industry. However, on a broad perspective, external growth is more suitable. “Strategic alliances, such as joint ventures and licensing agreements, between an MNC and a local partner in a host country are becoming increasingly popular as means by which a corporation can gain entry onto another country, especially developed countries.” (Hunger and Wheelen. 2008. Pg 233.) Establishing relationships with local governments, workforces and suppliers, can help an MNC enter and institute itself within a new country. It can then experience growth which will develop into a true global competitor, managing its worldwide operations as if they were completely interrelated. “Strategic alliances may complement or even substitute for an internal functional activity.” (Hunger and Wheelen. 2008. Pg 233.)

Furthermore, by forming strategic alliances and licensing agreements, a company can experience external growth on a trial basis. They can observe and analyze the market and all of the variables associated with this market from an external growth perspective. They have not committed to any long term contracts or made any purchases requiring the outlay of considerable finances such as required in a Green-Field Development. Once a company experiences confidence in developing relationships and operation, it should consider additional growth opportunities in the form of mergers, acquisitions and internal growth.


References

Lucky, D. (2007). External Growth Strategies. Retrieved March 1, 2007, from Canadaone. Website: http://www.canadaone.com/magazine/egs050198.html

Hunger, David J. & Wheelen, Thomas L. (2008). Concepts in Strategic Management and Business Policy. New Jersey: Pearson Prentice Hall.