What is Organic Growth Business and How Do You Achieve It?
Achieving sustained business growth helps to provide a solid foundation for a company’s longevity. Through continued expansion of its business operations, the company can increase its revenue growth, profits, and market share.
With additional working capital, the firm can open new locations. Over time, continued business growth opens the door to scaling up the company’s operations.
However, many business owners don’t realize that there are two distinct types of business growth. A business grows organically (or internally) when it uses existing resources and talent to successfully execute targeted strategies. Conversely, inorganic (or external) growth results from a merger or takeover.
Understanding both types of business growth is important. The company owner should ideally comprehend the distinction between organic and inorganic business growth, plus implications and real-world examples of each type. When the business owner is clear on those concepts, they can choose the strategy that positions their company for success.
What is the difference between organic and inorganic business growth?
Elaborating on the differences between organic and inorganic business growth is a useful exercise. By delving into the specifics (and advantages) of each type of business expansion, the company owner can obtain a more complete picture of each strategy.
What is an organic growth business?
A company that has achieved organic growth has reached that goal through optimization of its own operations. By successfully marketing its products or services, and effectively utilizing its resources and personnel, the organic growth business has entered an expansion mode.
Organic growth: new products and markets
To achieve organic growth, a company often launches new products or adds items to existing product lines. These actions may help the business realize sales growth from existing customers. Or, the business may use one of three workable methods to expand into new markets.
First, revamping a product’s marketing mix enables the company to target a new market for that item. By altering one or more marketing mix components (product, pricing, place, and promotion), the business can gear that product to a group of new customers. Effective use of social media will help build awareness about that product offering.
By using emerging technology, such as an eCommerce platform, a business can present its products to customers who don’t live near its brick-and-mortar stores. Taking another tack, new technology can result in decreased production costs. This could enable the company to reduce its prices and focus on a lower-income demographic.
Growing a business internationally presents heightened risks. Increased financial costs, logistics issues, and lack of cultural knowledge can make an overseas expansion a very complex undertaking.
Meet a successful organic growth business
Apple, the global computer and electronics manufacturer, has a long history of successful organic growth. During many years of producing the iPhone, iPad, and its other devices, Apple has spent relatively little money on research and development. Instead, Apple employees have a driving need for innovation, leading to multiple successful product introductions.
What is an inorganic growth business?
Inorganic growth businesses expand through mergers and acquisitions. A business can grow inorganically regardless of the profitability of its operations. Even a business that’s negatively impacted by lower productivity or sales can experience inorganic growth.
Inorganic growth: Mergers and takeovers
A company can grow very quickly by one of two inorganic (or external) growth methods. Mergers between two businesses are fairly common, creating an entity that’s larger than either of the individual companies. In contrast, a business takeover occurs when a company grows by purchasing over half of the shares of another firm.
Inorganic business growth does have certain risks. Combining two companies together is time-consuming and expensive. Afterward, there isn’t a guarantee that there will be a positive outcome. In many cases, the purchased company has either closed down or been spun off into a separate entity.
Meet a successful inorganic growth business
In 2017, eCommerce leader Amazon purchased Whole Foods, the upscale organic grocery company with its own dedicated following. This acquisition provided Amazon with hundreds of brick-and-mortar stores, and enabled the company to position itself as a competitor in the food and grocery industry.
What are the advantages of organic growth business?
Growing a business organically has several distinct advantages. It’s possible for a company to enjoy multiple advantages at the same time.
Cost reductions and economies of scale
By purchasing larger quantities of supplies and/or wholesale products, the company will likely receive cost reductions from vendors. If the business produces its own products, it can realize an economy of scale through higher production levels. More production leads to lower overall costs, as expenses are distributed over more products.
Manageable and sustainable expansion
Organic business growth essentially puts the business owner in the driver’s seat. You choose your opportunities and the timeframe in which you pursue them. Because you oversee your company’s operations, you’re better able to manage and sustain business growth over time.
Growth financing options flexibility
An organic growth business has considerable latitude over its growth financing vehicle. Whether you draw upon your profits, or choose another internal financing method, you select the source. By avoiding an external financing method, you won’t have to pay conventional interest.
Decreased risk relative to inorganic growth
An organic growth business owner controls the resources and methods used to grow the company. Therefore, the business faces less risk compared to a company that grows through a merger or takeover. Both of these inorganic growth methods involve another business entity.
More interest from potential investors
Companies that grow organically tend to draw increased interest from investors. By analyzing the company’s operations and marketplace position, a potential investor can see that the business is experiencing growth due to consumer demand for its products or services. This organic growth strategy implies that the company is a good steward of its resources.
7 ways to achieve organic growth in business (with examples)
Organic growth strategies are especially relevant for new businesses with limited assets and resources. The company can expand upon its successes without incurring additional debt or undertaking considerable risk.
View seven common organic growth tactics that diverse businesses have successfully employed. Next, note an example of a company that used each technique to its advantage.
Invest in additional production capacity
When a company devotes resources to enhanced production capacity, it positions itself to better satisfy the market need for an in-demand product or product lines. The business may add new equipment and personnel to an existing facility. Or, the company might build a new plant in a strategically located region.
Trex Company is a leading manufacturer of low-maintenance composite decking materials. The company’s eco-friendly products are widely used in residential and commercial construction and remodeling projects.
In early 2021, Trex announced the opening of a brand-new Virginia manufacturing plant. The facility is a key component of Trex’s $200 million growth and expansion strategy.
Optimize your sales and marketing mix
A company’s marketing mix provides a framework for its product sales and marketing programs. A marketing-savvy business can adjust the four marketing mix components (product, price, place [distribution method], and promotion) to get a specific product or group of products to a predetermined target market.
Amazon has become a worldwide eCommerce behemoth with a strong foothold in many diverse markets. The company constantly tweaks its marketing strategy based on changes in market conditions and target market characteristics.
Recently, Amazon began analyzing data gathered from thousands of customers’ shopping and buying habits. Next, Amazon personalized its product offerings to fit each consumer’s recorded preferences, often resulting in sales conversions.
Create growth through business model innovation
Choosing an innovative business model can help a company carve out a distinctive niche in a crowded market. The model may be built around a groundbreaking new product or a method of marketing that product to its target customers. On occasion, the entire business model is constructed on a brand-new paradigm that bucks the industry’s way of doing business.
The Airbnb virtual marketplace takes advantage of the increasingly popular sharing economy. Airbnb’s business model is built on the premise that hosts (or accommodations providers) will rent out unused space to strangers seeking short-term rentals. Hosts may offer to rent the entire place (such as a private island), a hotel room, a shared room, or a private room.
This unconventional business model has enabled Airbnb to grow into the world’s largest accommodation provider. Airbnb doesn’t list a single room among its assets, making this an especially impressive achievement.
Develop new products and services
Every new product or service introduction offers opportunities for organic growth. First, a company should perform market research to verify the need for the product or service. Next, the business should stage the necessary resources and systems to bring the item to the marketplace.
LEGO is an excellent example of an innovative child’s toy that has lived on for generations. In 1949, the Danish company LEGO brought its first plastic brick to market.
Over the years, the company kept tweaking the brick, and finally patented it in 1958. Since then, millions of children (and adults) worldwide have created LEGO structures. LEGO creations have also received international toy industry acclaim.
Throughout decades of organic growth, LEGO has never acquired another company. Instead, it spurred revenues and profits through innovation and product development. Since 2007, LEGO has tripled its global revenues.
Leverage online sales and delivery platforms
Online sales and delivery platforms keep increasing in popularity. One rapidly growing market is the direct-to-consumer (or D2C) segment. In this business model, companies fabricate and ship their own products directly to the consumer. Control over the manufacturing and distribution process enables the business to offer lower prices.
BarkBox, a rapidly growing D2C startup in the pet product industry, has become a subscription-based online retailer that caters to dedicated dog lovers (especially the lucrative millennials market).
Each month, the company ships a BarkBox full of quality dog supplies to its subscribers (and presumably their canine companions). This organic growth business has met with notable success, leading BarkBox across the $150 million sales threshold.
Open new locations in other regions
Opening one or more new regional locations is an excellent example of organic business growth. Take advantage of your company’s existing systems, processes, and economies of scale.
As part of your pre-opening market research, familiarize yourself with each region’s culture and business climate. Strongly consider hiring qualified local managers, as that will help to provide your company with added credibility.
DoorDash, the nationally known food delivery service provider, has plenty of experience with regional expansions. Founded in 2013, the company had already launched operations in many new cities and towns by early 2020.
Then, the COVID-19 pandemic led to lockdowns in many regions, and DoorDash experienced rapidly growing demand in multiple areas. The company also expanded its offerings into in-demand grocery and pharmacy products. Today, DoorDash offers restaurant delivery service in over 500 cities across the United States.
Expand into new international markets
Establishing a presence in overseas markets enables a business to enjoy organic growth on a global scale. Before jumping into international sales, however, the business owner should commission extensive research on the target country’s market landscape and business culture.
UnderArmour, an international supplier of sports and casual clothing, has approximately $2 billion in annual turnover. The company experiences more than 20 percent yearly growth, largely through expansions into overseas markets. The firm’s D2C segment is also growing very quickly.
Multiple organic growth strategies prove effective
Interestingly, using multiple strategies together is remarkably effective. In 2017, marketing and sales consulting firm McKinsey & Company reviewed the share-price performance of 550 United States and European companies over a 15-year period.
The McKinsey analysis revealed that for every revenue growth level, companies that reported higher organic growth produced larger shareholder returns than firms with growth supported mostly by acquisitions. Executives at companies with higher-than-market growth reported using multiple organic growth strategies.
Are there any disadvantages of organic growth business?
Growing a business organically presents some potential disadvantages. Some companies can face more than one downside at once.
Long-term organic growth depends on the industry and market
To realize sustained organic growth, a business should be positioned in a growth industry. If a specific industry has reached the maturity phase, companies may find it difficult to expand.
Market conditions can negatively affect a company’s organic business growth. In a very slow economy or recession, consumers may keep their wallets tightly closed for everything except essential purchases.
A market leader may have limited growth prospects
If you operate a successful company, and you’re the leader in your market, you may face a cap on your organic growth potential. Stated another way, you might not be able to increase your market share. In that case, you may choose to expand the business through diversification.
Potential extended timeframe between investment and payoff
An organic growth business expands as a direct result of profitable business operations. To execute this growth strategy, the company likely invested money in different business components, equipment, and operations.
A return on investment (or ROI) is rarely instantaneous. Therefore, the company must be prepared to wait for an extended period to recoup its funds.
Investors and/or shareholders may want faster growth
Growing a business organically takes time and requires patience. However, the company’s investors and/or shareholders may become impatient with the slow business growth rate.
Naturally, the investors want a faster return on their money. The shareholders see accelerated growth as a vehicle to a higher stock price.
Difficulty in managing franchised businesses
If a company experiences organic growth through franchising, tracking franchisees’ business operations may be a challenge. If franchisees are in different geographic regions, or there are many franchises to monitor, that task can become even more difficult.
How to make the best choice for your business
Deciding which growth avenue to pursue is an individualized decision. To choose the right path, examine your business’ short-term and long-term objectives. Identify your company’s current market position, competitive landscape, and any relevant external influences.
Objectively analyze your company’s current and projected financial situation. Finally, determine (as accurately as possible) the potential implications of an organic vs inorganic growth strategy.
Using this information, implement the growth strategy that best aligns with your business’ current situation and available resources. Once you execute the growth strategy, regularly monitor your company’s progress and be prepared to make adjustments to realize the optimal outcome.
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