Organic Growth Meaning

Explanation

  • A company has several ways of achieving growth and several measures of measuring the same. The sources of growth can be broadly classified into two categories- organic growth and inorganic growth. First, it implies internal growth, which is an outcome of increasing efficiency or improvement in market conditions such as economic cycles, greater demand for products, and other factors that increase the sales revenue and profit of the company.On the other hand, inorganic growth deals with growth achieved through the synergies of mergers, acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more, and other such takeover activities. It is so-called because the company uses external growthExternal GrowthExternal growth is an inorganic growth strategy in which a company expands its business activities by using external resources and capabilities.read more opportunities and the capabilities of other companies to increase their growth rate.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Organic Growth (wallstreetmojo.com)

Examples of Organic Growth

One of the oldest companies in the beverage market, Coca-Cola, first started in 1886. Until 1948, it captured approximately 60% of the market share, and by 1984, this share had reduced to 21% when it began facing stiff competition. The company made its first acquisition in 1960 by acquiring Minute Maid. Therefore, from 1886 to 1960, the company grew organically, a growth period of 74 years.

During this time, the company’s ownership changed many times. However, the company did not make any acquisitions. Instead, it based its growth solely on organic development.

Every company uses a combination of both strategies because, after a while, the company reaches the mature stage of the product life cycleProduct Life CycleThe term “product life cycle” refers to the entire process that a product goes through from the time it is launched in the market until it is taken off the market and is divided into four stages: introduction, growth, maturity, and decline.read more. To stay relevant, it either has to diversify or develop new products. In 2018, the organic growth of the company was 5% globally.

Strategies

Several organic growth drivers can tackle different line items on the income status to increase the bottom line. These can be broadly classified as follows: –

#1 – Increase in Sales Revenue

One can achieve it in various ways: –

  • Selling more units at the same price requires increasing product awareness through sales promotion and marketing efforts. Developing brand investing in advertising might expand the demand.One way of doing this is to sell the same units at a higher price by creating market segments, such as the snacks in the cinemas.Also, one can do it by exploring more geographical areas, such as rural areas or international sales. Therefore, one way of achieving growth is by impacting the top lineThe Top LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. read more.

#2 – Reducing Cost

There are various kinds of costs that go into producing goods and services. Material, labor, and overheads are three broadheads for the same.

  • Sourcing raw materials cheaply through developing a vendor network is one way to keep material costs in check.Hiring more contract labor per the regulatory guidelines is another cost-cutting.Locating the plant near the source of raw material is also a way to reduce transportation costs.Nowadays, people have also reduced office space as one can do a lot of work online. As a result, companies opt for shared working spaces to reduce fixed expenditures.

#3 – Improving Operational Efficiency

One can achieve this by conducting periodic training of the operations personnel so that the marginal productivity of labor increases and the value added by each labor is higher.

Importance

Below is some significance.

#1 – Brand development

Organic growth is an essential factor in developing the brand. The sustainable existence of its range of products for decades makes the company a household name. For example, Coca-Cola has existed for decades because it grew organically first. A product has to become successful to create faith and confidence in the consumers about the company.

#2 – Drives Inorganic Growth

Organic growth provides companies the resources to achieve growth through mergers and acquisitions. It acts like a platform used for inorganic growth. Even the target companies would want to merge into more prominent brands only if they see some benefit from it. In addition, MergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more imply that both companies exist under the same umbrella. Therefore, target companies would not want to involve themselves in a merger, which does not lead to synergies.

Difference between Organic Growth and Inorganic Growth

#1 – Meaning

Organic growth is achieved by increasing sales revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity’s income statement/profit & loss account.read more or reducing costs to achieve greater profits. Inorganic growth is achieved through mergers and acquisitions by a big company. It thinks that a specific smaller player would add synergySynergySynergy is a strategy where individuals or entities combine their efforts and resources to accomplish more collectively than they could individually.read more or help in diversifying its product range.

#2 – Life Stage

Organic growth is mandatory at a primary stage for a successful company. At the same time, inorganic growth can only follow steady growth. No company exists solely to acquire other companies. That is the motive of a retail investorRetail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more who invests in a company’s stock. An investor with a control perspective needs a more significant reason for entering into inorganic growth.

#3 – Growth Rate

Organic growth is achieved slowly over time as the brand gets established. However, inorganic growth is performed relatively quickly because both acquirer and target have reached a certain level of organic growth if it is not a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more, it is a consensual interaction and, therefore, can be achieved quickly.

Advantages

  • Brand Grooming: It leads to the development of the brand. If successful, the brand reaps benefits for centuries. The company reaches the too big to failToo Big To FailToo Big to Fail (TBTF) is a term used in banking and finance to describe businesses that have a significant economic impact on the global economy and whose failure could result in worldwide financial crises. Because of their crucial role in keeping the financial system balanced, governments step into saving such interconnected institutions in the event of a market or sector collapse.
  • read more level.Streamlining and optimization: It leads to greater efficiency and streamlines costs and sales to the optimum level. That might not always be possible in the case of inorganic growth, leading to several duplications of areas as each company has its existing systems. When they merge, these systems may not gel well and may have to exist independently, causing a drain on the company’s resources.

Disadvantages

  • Slow: Getting established in the market and staying relevant takes years or even decades. One can achieve organic growth overnight. In comparison, inorganic growth is a lot faster, if not overnight.Low success rate: Not every company can succeed organically. Out of many coming into the business, very few can stay till they can start earning profits, and even fewer can become a concern in the true sense. So, the failure rate is very high.

Conclusion

Therefore, we understand that organic growth can be achieved through increasing sales, reducing costs, and increasing efficiency. It leads to brand development, but it is a long-term process. It has a high risk and high return profile because success is achieved after a long gestation period. But if completed, it lasts for decades and, in some cases, for even centuries.

However, we also need to understand that it ends after the product or the company reaches saturation. From this point onwards, the company must either diversify or integrate. These can be achieved either internally or through inorganic growth channels.

This article is a guide to Organic Growth. We discuss organic growth strategy, importance, organic growth examples, advantages, and disadvantages. You may learn more about financing from the following articles: –

  • Types of Mergers and AcquisitionsMergers & Acquisition CourseHorizontal MergerReverse Merger