Categories
Uncategorized

Understanding Organic vs. Inorganic Growth

Organic Growth vs. Inorganic Growth: What’s the Difference?

Growth is a positive indicator that a business is doing well and can be measured in many ways, including sales, revenue, profit, market share, and share price. 

Expansion can be achieved by two different methods – inorganic growth vs. organic growth. Strategies are different for each approach. To discover the best tactics for your business, you’ll need to take a deeper look at organic and inorganic growth, and the pros and cons of each. 

Organic vs. Inorganic Growth 

Deciding between organic and inorganic growth strategies requires constant evaluation of the company, your industry, private capital markets, and personal objectives. Let’s start with some definitions of organic growth vs. inorganic growth and how they compare.

What is Organic Growth?

Organic growth is driven internally and usually takes longer than inorganic growth. Businesses measure results year-over-year by comparing revenues and share value. 

Strategies are typically based on a combination of the following tactics:

  • The optimization of company processes
  • The reallocation of resources
  • New product offerings
  • Favorable pricing strategies

What is Inorganic Growth? 

Inorganic growth is the opposite of organic growth in that it derives from external deals rather than an increase in business activities. Inorganic business growth is usually the faster method, although it’s not a quick fix for an existing decline. Furthermore, it is highly recommended that businesses are already stable before considering these tactics:

  • Mergers
  • Acquisitions
  • Joint ventures

Pros and Cons of Organic Growth

There’s no clear-cut answer on the best option between organic growth vs. inorganic growth, as each has pros and cons. 

Pros of Organic Growth

Let’s take a closer look at the pros of organic growth: 

Better Focus – Your management team is already familiar with your business plan, and it’s likely your teams already work cohesively together. Familiarity like this takes time to develop after a merger. 

No Restructuring Challenges – Avoid the layoffs, personnel changes, and transitions to new processes and products that come with an inorganic growth strategy. 

More Control – Entrepreneurs that stay true to their goals and avoid acquisitions and mergers (A & M) have more control over business direction. 

Investor Attraction – A business with solid yet gradual growth is often more attractive to investors than one with rapid inorganic growth. 

Sustainability – Consistency is key. Without organic growth, your business is unlikely to retain value or become an acquisition target in the future.

Cons of Organic Growth

With the pros of organic growth explained, let’s explore the cons. 

Speed – Organic growth is slower because it is limited by resources, personnel, and available support. 

Loss of Competitive Edge – In markets where competitors are growing quickly or where M&A are commonplace, it can be difficult to keep up with the pace–especially when competitors that have already merged lower their prices or allocate resources more effectively. 

Hitting the Wall – Businesses relying solely on organic growth may reach a capacity point where they no longer have the resources to continue on the same trajectory. 

Pros and Cons of Inorganic Growth

It is challenging for companies to achieve rapid growth purely through internal functions. This is why looking at an inorganic strategy is sometimes a necessity. 

Pros of Inorganic Growth

Pros of inorganic growth include: 

Fast-Paced Growth – Through M&A transactions, your customer base increases, and your client list is extended. 

More Assets – With inorganic growth strategies, you acquire assets and resources virtually overnight. 

Increased Market Share – You reap the benefits of new market penetration and simultaneously inherit data insights and client relationships. 

Increased Knowledge Base – Joining forces with other firms provides a broader skills and knowledge base and more top-level managers to continue pushing plans forward. 

Strong Credit – With the value of two businesses combined, you will likely have access to stronger credit lines. 

Competitive Edge – By growing more rapidly than your competitors, you gain strategic advantages in purchasing, pricing, and overall reach. 

Cons of Inorganic Growth

What are the cons of organic growth? These can include: 

Upfront Costs – If you don’t have cash readily available, you may have to take on debt to complete the M&A. This is risky if the takeover doesn’t go well and could deter investors. 

Scaling Challenges – Rapid growth leads to complexities in restructuring at all levels, affecting service, sales, and support. If not well managed, the integration may fail. 

Inadequate Operational Processes – Acquiring another business requires having organizational processes in place to ensure a smooth transition. Big changes to operating systems and processes can lead to confusion and company-wide inefficiency.

Acquire Funding to Accelerate Your Growth

There’s no need to choose outright between organic growth vs. inorganic growth strategies as a permanent business decision. Most companies find a combination is the best way to diversify their revenue base without relying too heavily on one method over the other. 

Need help getting funding? L3 Funding is the go-to financial resource for businesses looking to grow. We specialize in helping organizations understand their financial options and provide a range of solutions, each customized to your individual business needs. Whatever type of merchant funding you need, L3 Funding is here to help you succeed.