Home > Economics FAQs Blogs > What must a firm do to achieve internal growth and how is productive capacity defined?
This question pertains to topics in Microeconomics and Business Economics, such as Production and Growth
Internal Growth: Also known as organic growth, it is the process of business expansion through increasing output and sales as opposed to mergers, acquisitions and take-overs. The firm uses its own production capabilities and resources to increase the scale of operations and sales.
Productive Capacity: This refers to the maximum output that a firm can produce without strain, given its current resources such as capital, labour, technology, and managerial competence.
To achieve internal growth, a firm may engage in various strategies including:
Investment in Capital: By purchasing more machinery or improving existing technology, firms can increase their productive capacity. This might involve investment in research and development to create more efficient or innovative products.
Improving Human Capital: Firms can invest in their workforce through training and development, which can lead to improved productivity and hence, growth.
Expanding Marketing and Sales Activities: This could involve entering new markets or improving marketing strategies in existing markets to boost sales.
Efficiency Improvements: By improving operational efficiency, firms can increase their output without the need for additional resources. This could involve streamlining processes or reducing waste.
Productive capacity is an important concept in this discussion. It is defined as the maximum output a firm can produce given its current resources. If a firm is operating at its productive capacity, it means it is maximising the use of its resources. When a firm grows internally, it aims to increase its productive capacity, either by improving the productivity of existing resources or by acquiring more resources.
Amazon: The e-commerce giant has consistently focused on internal growth. It has invested heavily in technology and infrastructure, expanded into new markets, and has consistently worked on improving operational efficiency.
Tesla: The electric vehicle manufacturer has also followed a path of internal growth. It has invested heavily in research and development and has expanded its productive capacity by building new factories around the world.
To achieve internal growth, a firm needs to increase its productive capacity. This could involve investing in capital, improving human capital, expanding marketing and sales activities, and improving efficiency. Productive capacity is defined as the maximum output a firm can produce with its current resources. Real-world examples of companies achieving internal growth include Amazon and Tesla.
