Answers

Professional Level – Essentials Module, Paper P3 Business Analysis 1 (a)

December 2013 Answers

Internal growth, sometimes called organic growth, takes place when the company grows by building on and developing its own existing competencies. This is how MachineShop has grown to date. The frequent opening of new stores represents its organic growth. The company appears to be comfortable and successful in this approach. As well as being familiar with this approach, internal growth has a number of other advantages for MachineShop. First, MachineShop is the only company which really understands the market that it has positioned itself in. Consequently, there are no equivalent companies or competitors to target for acquisition and so there is no clear alternative to organic growth. This market knowledge is a core competence, creating and reinforcing competitive advantage. Second, although the final cost of developing through organic growth may be greater than through acquisition, the spread of cost may be easier to bear. Acquisitions usually require a major expenditure at a certain point in time. A slower rate of change, associated with more gradual expenditure and sustainable growth, may also minimise disruption to other activities within the company. Acquisition can be a significant distraction and it could easily prevent the directors from continuing their successful expansion of the MachineShop stores. In some circumstances, internal growth may be the only realistic option available to an organisation. This may be the case at MachineShop. It acknowledges that it is having difficulty in identifying companies to acquire or with which to pursue a strategic alliance. FRG, analysed in depth in the second part of this question, is the best fit that MachineShop can find, yet it is a business which primarily deals with trade customers and larger machines and it has