What is Organic Growth?
Organic Growth is growth that 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 in Business Strategy
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.
Organic growth strategies utilize a company’s internal resources to improve its revenue and total output, i.e. the number of transactions or customer acquisitions.
The successful execution of organic growth stem 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 to generate organic growth are as follows:
- Investments into Existing Product or Service Offerings in Portfolio
- Internal Development of New Products or Services (R&D)
- Improvements to Business Model and Growth Strategies, e.g. Go-to-Market Strategy, Target Customer Profile, Pricing Structure
- Re-Branding Initiatives Post-Analysis of Customer Insights and Market Data
- Restructuring of Organizational Hierarchy and Processes, e.g. Company Culture, Cost-Cutting
Strategies to Achieve Organic Growth
Organic growth stems from the optimization of a company’s business model from the collective efforts of the management team and their employees.
Generally, most organic growth strategies are oriented around the maximization of a company’s current revenue trajectory, cost structure optimization, and improving operating efficiency to increase profit margins.
- Revenue Maximization
- Cost Structure Optimization
- Operating Efficiency Improvements
The primary appeal to organic growth is that management can control the process more closely and can 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 – hence the importance of a reliable leadership team to properly delegate tasks and put the business plan into action.
Organic Growth vs. Inorganic Growth
Pros/Cons of Organic “Top-Line” Growth
Usually, a business turns to inorganic growth strategies (M&A) once its organic growth opportunities have been depleted.
There are two approaches undertaken by companies to achieve growth:
- Organic Growth
- Inorganic Growth
Inorganic growth arises from activities related to mergers and acquisitions (M&A) rather than growth from internal improvements to a company’s 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 to organic growth, inorganic growth is often perceived as the route a company pursues once it is in the later stages of its overall life cycle and the potential opportunities to drive future organic growth have diminished.
Inorganic growth strategies typically come after organic growth is no longer attainable, at least in theory. In reality, because of the competitive nature of certain markets – particularly those oriented around technical capabilities – M&A is often utilized 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 often 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 a 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 very costly and disruptive to the core operations of all participants.