Organic Growth vs Inorganic Growth: Understanding Pros & Cons

However, the abrupt diversion of your business line and its management has its risks and benefits. Inorganic growth refers to a company’s growth through mergers, acquisitions, and partnerships with other companies rather than through internal, organic growth. An inorganic growth strategy involves pursuing external growth opportunities to expand a company’s business and increase its market share. Organic or internal growth involves developing the business from scratch. In other words organic growth or internal growth involves the expansion of the firm’s size, profits and activities achieved without merging with or acquiring other firms.

The smart blend of internal and external growth helps create shareholder value that any investor would be interested in and prevents you from falling prey to any untimely catastrophes that block your way. Growth is indispensable no matter where you invest, what you invest or how you invest. Be it organic or inorganic, it has a significant role in optimizing business capital. A common misconception is that inorganic growth will repair the currently declining growth of a company.

Organic growth can insulate firms

Without mergers or acquisitions, entrepreneurs have more control over the direction the business is headed. According to a study from McKinsey, S&P 500 companies that had higher organic growth tended to outperform companies with the least organic growth when assessed at comparable growth levels. Such rapid and seemingly easy growth may make the company forget what success is all about. However, after analyzing the type and reasons of growth, they may change their minds.

Inorganic growth and acquisitions are not necessarily bad things, but they can mask problems with the company’s internal growth. When people refer to organic growth, they are essentially referring to growth stemming from a company’s operations. For example, if a company is in the business of making and selling soft drinks and sees sales of those beverages grow by 10%, that’s considered organic growth.

• It’s also difficult for companies to quickly respond to changes in market conditions and consumer preferences.
• Acquisitions can infer quicker cash inflow, faster sales generation, and easy-to-penetrate new technologies and markets, yet the effect could be unpredictably profitable or strenuous—it depends on multiple criteria.
• However, buying another entity can put the acquirer at financial risk, since it must pay the shareholders of the acquiree a substantial amount of assets.
• However, not everything can be handled merely by growing organically.
• However, the abrupt diversion of your business line and its management has its risks and benefits.
• Through inorganic growth, you are gaining the benefits of an entire company’s prior sales and relationships, which means you’re immediately gaining markets and clients that you otherwise may not have had access to.

Inorganic growth comes from mergers, acquisitions, and joint ventures. The most common causes for inorganic growth strategies falling short of expectations include overpaying for acquisitions, inflating synergies, corporate cultural differences, and inadequate due diligence. The downsides to inorganic growth is the large upfront costs and management challenges with integrating acquisitions. If a company merges with another in pursuit of inorganic growth, that company’s market share and assets become larger. This offers immediate benefits such as the additional skills and expertise of new staff and a greater likelihood of obtaining capital when needed. As well, it allows a company to grow much faster and almost immediately increase its market share.

What Is Inorganic Growth?

It is worth pointing out that managers who are risk averse are more likely to favour organic growth over inorganic growth. As is commonly the case, it’s not a simple equation of growth equaling good and more growth equaling better. This is a defensible view, but investors should still take time to understand the risks and potential rewards of each approach and pay attention to broader trends on the company’s balance sheet. In the case of the soft drink company, what happens if consumer tastes shift again, from iced tea to energy drinks?

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In other words, pulling the value out of mergers and acquisitions is more complex than taking credit for sales. Costs in the form of restructuring charges can greatly increase expenses. The purchase price of the acquisition can also be prohibitive for some firms.

Organic Growth: Pros and Cons

Firms can choose to grow inorganically in several ways including engaging in mergers and acquisitions and, in the case of retail or branch organizations, opening new stores or branches. We do not include them inorganic growth meaning because they do not involve internal efforts, i.e. the growth came from outside. ​​A VDR provider should be a trusted partner in these types of transactions and supply the appropriate tools required.

Plus, there’s the downside of potentially using debt to fund inorganic growth. On the flipside, inorganic growth might not fully repair declining organic growth or internal issues. Organic growth is 100% internal growth, i.e., when a business grows thanks entirely to the effective use of its own internal resources. It is important to note that nearly any business can pursue either strategy. Although many smaller businesses do not believe that acquisitions are appropriate for them, this is not the case.

Power of Combining Organic and Inorganic Marketing

This is compared with inorganic growth, which is growth through merger or acquisition of another business. The inorganic growth rate also factors in the impact of foreign exchange movements or performance of other economies. Another option is to increase the number of units sold of existing products. This may be accomplished with more extensive marketing, essentially by selling more into existing sales regions. It may mean that existing customers buy in greater volume, or that new customers are found within existing sales regions. Unit volume can also be increased by expanding into entirely new markets.

Therefore if a firm wants to enter a market segment faster then it must pursue inorganic growth. This should have been one of the reasons why Zambeef acquired Master Pork as it was a faster way of entering the pork segment of the food industry. I still believe that organic or internal growth is the best avenue for any business. But focusing too much on organic growth can exclude you from reaping the benefits of acquisitions. Similarly, depending solely on the M&A profits affects your internal growth. Hence, a savvy move would be to implement a combined organizational growth strategy and get them in action.

This type of growth is simple to measure — that is done by comparing revenue to previous years. Organic growth is the opposite of inorganic growth, which is explained below. In contrast, the sales and revenue generated (excluding internal profits) accounts for inorganic or external growth. Acquisitions can infer quicker cash inflow, faster sales generation, and easy-to-penetrate new technologies and markets, yet the effect could be unpredictably profitable or strenuous—it depends on multiple criteria.

There are several ways in which a business can achieve solid organic growth. One option is to increase unit prices, so that customers are paying more for the same unit volume of sales. This approach is most tenable when pricing is relatively inelastic – that is, customers are willing to pay more, rather than buying elsewhere. If pricing is elastic, then price increases will result in an immediate decline in unit volume sales, which can be catastrophic. The implementation of external growth strategies can be challenging for a number of reasons. For example, a company that wants to acquire another entity may face resistance from the target’s management or shareholders.

Adding a new product, service, competing in a new geographical area, or gaining a large group of new customers quickly are all great reasons to go this route. For example, if Company A acquires (or merges with) Company B, the resulting company will have a larger customer base as well as being more competitive in the sector. Whether you choose to grow your organization organically or inorganically, your greatest focus should be on doing so in the most strategic way possible. Having this level of detail for whichever strategy you commit to will give you a detailed blueprint to make the most intelligent decisions to support and sustain growth. During a merger or acquisition, there’s typically restructuring of personnel and operations that occurs to manage the new volume of business.

• This means growth can’t overshoot the personnel, support, and resources available.
• Firms that choose to grow inorganically can gain access to new markets through successful mergers and acquisitions.
• As business and customer needs grow, receivables and other cash-consuming items and resources grow as well.
• The process includes expanding your wings—opening new outlets or branches or merging with other companies and joint ventures.
• Any type of M&A transaction – e.g. add-on acquisitions and takeovers – are risky endeavors that require substantial diligence into all the factors that can impact the performance of the combined entity.

But organic growth surely never disappoints if you have invested the appropriate intellectual capital and required resources. Let’s say the soft drink company above is losing its market share in the beverage sector because customers are gravitating to flavored iced teas. The CEO of the soft drink company could decide to launch a new product line but instead directs the company to spend $1 billion to acquire the world’s largest iced tea manufacturer. If you see a company with consistently strong organic growth, it’s generally a sign that the firm has a solid business plan and is executing it well. However, it is often hard for a company to achieve rapid overall growth through internal operations alone. It’s also difficult for companies to quickly respond to changes in market conditions and consumer preferences.