Making Sense of Organic vs. Inorganic Growth
Any new business owner’s initial goal is to grow their business into a self-sustaining entity. Without consistent or growing revenues, a business cannot support itself and will ultimately close its doors (or its website).
But what kind of growth is ideal for your business? Here we will cover and compare the two primary umbrellas: organic vs. inorganic growth.
What is Organic Growth?
Organic growth is internal growth that stems from:
- Successful decision-making
- Sustained profitability
- Strategic reinvestment in people and resources that expand output
Examples of Organic Growth
How can you tell if your company is growing organically? Compare your business’s growth to these scenarios:
- Creation – Developing new products or services your customers want, need, and pay for is a sign of organic growth. Perhaps your bread-and-butter product or service can reach new markets with minor changes, or a complementary offering is easy to launch. If your creations also create new business, that is organic growth.
- Improved performance – If your company’s revenue is growing based on decisions made internally, that growth is organic. Suppose you decided to invest an additional 10% of your budget into marketing or hired new sales representatives and saw increased revenue. The additional sales would be considered organic growth.
What is Inorganic Growth?
Inorganic growth occurs when your business expands—whether by acquiring other companies in your industry or by opening new branches or locations.
A good way to remember the difference between organic and inorganic growth is that the former is driven internally, while the latter involves third parties or external inputs.
The Benefits of Organic Growth
Achieving organic growth is a sign that your business model is currently succeeding. It is among the best indicators that your operations and products fit your market and that customers are engaged and returning.
Because it is driven internally, organic growth is:
- Easier to sustain – The aspects of your operations model, product and services, or combination of the two that are driving organic growth are already present, so it is easier to continue. The biggest challenge is performing analysis to identify precisely what those are and derive more insights into where and how to refine them further.
- More adaptable – When growth occurs inorganically, more stakeholders and decision-makers are involved at every stage of your processes. In contrast, organic growth is less hindered by organizational friction and red tape. This keeps operations more streamlined and allows you to pivot or adopt new organic growth strategies more easily.
- More knowledgeable about processes and resources – Organic growth tends to happen gradually and with less organizational disruption. So, your managers and employees have more time to develop their knowledge about your processes and various resources like software implementations.
However, the biggest benefit of organic growth may simply be the confidence that your structures and actions are working.
The Challenges of Organic Growth
Of course, organic growth has challenges as well. Some of the reasons organic growth alone may not be enough to sustain your business include:
- It is slow – Being reliant on your company’s existing resources and personnel, organic growth will always be somewhat constrained by their capabilities. Inorganic growth adds new inputs to the equation, so it will generally occur and reach benchmarks faster.
- It is vulnerable to competitors adopting inorganic strategies – You may compete with businesses in your industry that are growing inorganically. Because organic growth tends to be slower, those competitors may be able to quickly corner enough of the market through mergers and acquisitions to make competing with them much more difficult.
Organic growth is good and should always be a primary goal. But it does have some limitations. Fortunately, these can be overcome by adopting complementary inorganic growth strategies.
The Benefits of Inorganic Growth
In many ways, the pros and cons of inorganic growth balance its counterpart’s. As a result, it is advised to adopt a strategy that hybridizes the two. By incorporating some inorganic growth, you can more easily achieve:
- Faster goal accomplishments – Inorganic growth typically is transactional; you merge your business with another company or open a new location. This leads to immediate growth in your market share, client list, and capabilities as opposed to growth over time.
- Expanded opportunities and potential – Consider your sum total of personnel, their knowledge, and your resources. Merging with or acquiring a competitor immediately boosts it—potentially doubling in size. You gain access to new partnerships and clients, integrate top sales staff, and more benefits from simply increasing what is at your disposal.
- Pressure on your competitors – Just as you do not want to be the only company in a market growing organically, adopting an inorganic growth strategy can allow you to quickly gain a greater competitive edge on those in your industry.
Inorganic growth is a popular strategy for many businesses, with good reason.
The Challenges of Inorganic Growth
However, inorganic growth does have challenges. These are the main obstacles you may face when growing inorganically:
- You may face significant integration and restructuring challenges – When you grow through mergers and acquisitions, you also have to tackle combining the organizations. If you open a new location, you must ensure that all relevant supporting processes and personnel are in place. The decisions you will face include matters regarding:
- Redundancies (e.g., roles, technology platforms)
- Blending company cultures
- Supply chain management and logistics between more locations
- It can jeopardize your current organic growth – Depending on how you manage those integration and restructuring challenges, you may make significant changes that disrupt the elements driving your previous organic growth.
- A loss of autonomy – When you grow inorganically, you will inevitably have to make concessions to your new partners that depend on the nature of your agreement. That will include your company vision, and it will be an ongoing process of “give and take.” For example:
- Acquiring or merging with another business can become a sensitive situation; people will be concerned about job security or the company’s new direction. But an organization’s people are one of the main drivers behind acquisitions and a crucial resource you do not want to lose. You will need to adopt new efforts to prevent that (e.g., keeping company culture, providing new incentives).
Despite these challenges, inorganic growth can be an excellent way to scale your company successfully. But you will undoubtedly need to find the right partners for your circumstances and critically evaluate your long-term strategies to determine how to best leverage inorganic growth.
Determine Your Growth Strategy with CFO Hub
A strategic blend of organic and inorganic growth can bring your business to the next level and attract quality investors.
And our network of financial professionals at CFO Hub can help you determine the best partners and ways for your business to grow. Whether you need a short-term consultant or a full-time CFO to lead your financial team through the next stages of growth, CFO Hub is here for you.
Reach out to us today to learn more.