Organic Growth is growth that is achieved from a company’s internal initiatives to improve its business model, resulting in improvements to a company’s revenue growth rates, profit margins, and operating efficiency.
Businesses can achieve organic growth by expanding into new markets, improving their existing product/service mix, enhancing their sales and marketing strategies, and introducing new products.
Organic growth occurs from the internal efforts of management to improve its current operations, resulting in increased revenue generation and operating profitability.
Organic growth is the byproduct of deliberate business plans implemented by management to improve a company's growth profile.
The strategies utilized rely on a company's internal resources to improve its revenue generation and output, i.e. the total number of transactions, customer acquisitions, and limited customer attrition.
The successful execution of the strategies stems from a strong, disciplined management team, effective internal planning and budgeting, and an in-depth understanding of the target market (and end-users served).
Common examples of strategies used by companies to drive organic growth include the following types:
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The premise of organic growth is the optimization of a company's business model from the collective efforts of the management team and their employees.
Generally, most strategies that fall under this category are oriented around the maximization of a company's current revenue trajectory, cost structure optimization, and operational improvements to increase profit margins.
The primary appeal is that management can control the process more closely and plan the strategies using a “hands-on” approach internally – albeit, all business plans must remain flexible, given unanticipated changes to prevailing market conditions.
Management possesses more control over the business model and can implement changes appropriately using their own judgment. Therefore, it is important to have a reliable leadership team to properly delegate tasks and put the business plan into action.
Usually, a business turns to inorganic growth strategies (M&A) once its organic growth opportunities have been depleted.
Companies undertake two approaches to achieve growth:
Inorganic growth arises from activities related to mergers and acquisitions (M&A), rather than growth from internal improvements to existing operations. The drawback to organic growth, however, is that the process can be slow, and the upside can be limited (i.e. "capped").
In comparison, inorganic growth is often perceived as the route a company pursues once it is in the later stages of its life cycle, and the potential opportunities to drive future organic growth have diminished, i.e. inorganic growth comes once organic growth is no longer attainable, at least in theory.
But in reality, the competitive nature of certain markets – particularly those oriented around technical capabilities – has caused M&A to be used as a defensive tactic to obtain an edge in terms of intellectual property (IP) and patents, even if the acquirer's organic growth outlook is still positive.
Inorganic growth is frequently considered to be a quicker and more convenient approach to increasing revenue, while organic growth can be time-consuming (and challenging) to achieve.
After the completion of an acquisition (or merger), the combined company can benefit from synergies – either revenue or cost synergies – such as greater access to potential new customers (and end markets), upselling or cross-selling products, creating complementary product bundles, improved per unit margins from economies of scale, and revenue diversification.
However, reliance on M&A for growth is easier said than done because of the difficulty to realize expected synergies, particularly revenue synergies.
In fact, M&A can easily backfire, as improper integration can be costly and disruptive to the core operations of all participants.
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