Eight shops, two ways to get there: Lena's Bakery Ltd has three shops, a queue at every counter, and a target: eight shops in five years. Both options below would make it bigger.
Marco's find
- An empty shop on Station Road.
Lena's find
- Bertorelli's, the bakery across town that has baked bread for forty years, is for sale with its two shops.
They are two different ways to grow.
The Station Road shop would be built by the bakery itself. Last year's profit pays for the ovens and the first month's rent, and two of its own bakers are trained to run it.
A business that gets larger using its own resources, by putting its profits back into more shops, new products or new ways to sell, is growing from within (internal growth, also called organic growth).
Four ways Lena's Bakery can grow from within
More shops
The Station Road shop, paid for out of the bakery's own profit. The same name, the same recipes, bakers trained in the first three shops.
New products
Wedding cakes to order, and sandwiches at lunchtime. Same ovens, same staff, more to sell to the customers who already come in.
New ways to sell
Orders taken online and delivered by van at seven, and bread supplied to cafés. Nothing is bought from anyone; the bakery reaches more people itself.
More capacity
The central bakehouse on Mill Lane that bakes for every shop, and a night shift of bakers. More bread from the business's own investment.
Buying Bertorelli's is different. Overnight the bakery would have five shops, Bertorelli's bakers and forty years of regulars, and none of it would have been built by Lena.
A business that gets larger by relying on another organization, buying it, joining with it or teaming up with it, is growing by joining others (external growth). Its kinds are a takeover (or acquisition), a merger, a joint venture, a strategic alliance and a franchise.
Internal growth: the Station Road shop
- Whose resources. The bakery's own profit, bakers and recipes.
- Speed. Slow: one shop at a time, as fast as the profit allows.
- Control and culture. Lena and Marco decide everything; the new shop works the way the old ones do.
- Risk. Lower: a small step into something the bakery already knows how to do.
External growth: buying Bertorelli's
- Whose resources. Another business: its shops, its staff, its customers.
- Speed. Fast: two shops and forty years of regulars in one day.
- Control and culture. Bertorelli's bakers have their own habits, and they come with the shops.
- Risk. Higher: a large payment at once, for a business Lena does not fully know.
External does not mean abroad: Opening a shop in another country with the bakery's own money is internal growth. Buying the bakery next door is external growth.
The test is not where the business grows or how big the step is. It is whether the growth was built by the business itself or came from another organization.
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What Goldcrust has that Lena does not: Goldcrust plc runs 400 bakeries and has advantages Lena's Bakery does not. That gap is why so many owners want their business to grow.
| Goldcrust plc | Lena's Bakery | |
|---|---|---|
| Flour | Bought by the lorry-load | Bought by the sack |
| Borrowing | From its bank at 5% | Paid 9% on the loan for its last oven |
| Its name | On buses across the country | Known in one city |
Six reasons to grow
Lower cost for every loaf
A bigger bakery buys flour in bulk and pays less per bag, and one bakehouse can bake for eight shops. The cost of each loaf falls (economies of scale), so the price can fall or the profit on each loaf can rise.
Easier, cheaper finance
Banks see a bigger business, with more shops and a longer record, as safer. It can borrow more, at a lower interest rate, than a small one.
A bigger share of the market
With eight shops, more of the city's bread is bought from Lena. A bigger share means more sales and more say over prices in the town (market share).
A name more people know
Every new shop is a sign on another street. The more people see the name, the easier it is to launch a new product or reach a new town (brand awareness).
Survival against bigger rivals
A three-shop bakery can be squeezed by a rival that cuts its prices, or bought by one. A bigger business has more to fall back on and is harder to push out.
Spreading the risk
Shops in several towns, and cakes and cafés as well as bread, mean one bad street or one bad product does not sink the business (diversification).
| Lena's Bakery today (3 shops) | If it reaches 8 shops | The reason to grow it shows | |
|---|---|---|---|
| Price of a bag of flour | $30 | $26, buying in bulk | Lower cost for every loaf |
| Interest on a bank loan | 9% | 6% | Easier, cheaper finance |
| Share of the city's bread | 12% | About 25% | A bigger share of the market |
| Where people know the name | Three streets | Across the city | A name more people know |
A reason must fit the business: Every reason to grow is true of some business. The question is which one fits the business in front of you. A reason with no detail from the case could be about any business.
Matching the reason to the case: If the case says the bank charged a high interest rate, the reason is finance. If rivals are copying the product, it is brand awareness or market share.
The owners have reasons of their own, too. Growth can mean bigger profits, bigger dividends and the pride of a name on the high street. For Lena's Bakery it is written into the plan: eight shops in five years is the owners' strategic objective.
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Lena says no: Marco wants the eight shops. Lena is not sure she does.
Why Lena holds back
- Her customers. She knows the names of half the people in the queue.
- Her baking. She shapes the sourdough herself at five every morning.
- The cost. Five more shops would cost about $1 million, most of it borrowed.
- Her days. She would spend them in meetings instead of at the bench.
Most businesses in the world are small, and many of them stay small on purpose. Staying small is a choice with its own reasons, not a failure to grow.
The owner keeps control
- Growth needs money, and outside money comes with conditions
- New investors would buy shares and dilute Lena's 50%
- A small business is run the way its owner wants
Customers get the personal touch
- Lena knows her regulars and bakes what they ask for
- Quality is easier to keep when the owner sees every loaf
- That is why people pay $3 for her loaf and not $1.20 at the supermarket
Less risk, less money needed
- No $1 million loan, so no repayments if sales fall
- A small business can change quickly: a new recipe tomorrow
- Fewer staff and managers, so it stays simple to run
Some businesses stay small because of the market, not the owner. A sourdough bakery serves a small group of customers who want something special (a niche market), and there may simply not be enough of them for eight shops. A village shop can only sell to the village.
And small businesses are often helped to stay that way: many governments charge them lower taxes or offer grants that a large business cannot get.
Marco: grow to eight shops
- Costs. Flour in bulk lowers the cost of every loaf.
- Finance. A bigger bakery borrows more cheaply.
- Rivals. Goldcrust's shop across the road can cut its prices; small could mean squeezed out.
Lena: stay at three
- Control. No new investors, no bank setting the terms.
- Quality. The loaf people queue for is the one she shapes herself.
- Risk. No $1 million debt if the new shops do not sell.
Which one is right depends on: What the owners want: Marco wants a chain, Lena wants a bakery. How big the market is. How much money the business can raise, and at what cost. How hard the rivals are pushing.
A good answer weighs these for the business in the case, and does not assume that bigger is better.
How this comes up: This topic comes up as three short questions, each tied to a named business.
The three questions
- Distinguish between internal and external growth, with reference to a named business, for four marks.
- Describe one feature of internal growth, for two.
- Explain one reason why the owner would want to grow the business, for two, with a detail from the case.
The four-mark distinguish pattern
- Say what internal growth is. The business grows using its own resources, such as its own profit, to open shops, add products or expand what it already does.
- Show it in the case. Lena's Bakery opened its second and third shops itself, paid for from its own profit.
- Say what external growth is. The business grows by relying on another organization: taking it over, merging with it, or forming a joint venture or alliance with it.
- Show it in the case, and the difference. Buying Bertorelli's would add two shops at once, with staff and customers the bakery did not build.
Two traps: Two definitions and no case. Both halves need the named business. Two correct definitions with nothing from the case stop at two marks out of four.
The difference left unsaid. Distinguish means make the difference plain: own resources against another organization's, slow against fast. Use a word such as whereas, or put the two side by side.
With reference to Lena's Bakery, distinguish between internal and external growth.
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Internal and External Growth
Big Idea: Businesses can grow internally (from within, using their own resources) or externally (by joining with or buying other businesses). Each approach has different benefits and risks.
Internal (organic) growth
Internal growth means expanding gradually using the business's own resources -- opening new locations, developing new products, or increasing marketing to attract more customers.
- Advantages: easier to manage, lower risk, maintains company culture, financed from retained profits, growth is sustainable
- Disadvantages: slow process, limited by available resources, competitors may grow faster externally, may miss time-sensitive opportunities
A local cafe opens a second location across town, funded by its own profits. This is internal growth -- slow but manageable.
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