At some point, you are going to think about expanding your business. Hopefully, your business has been very successful and you want to take it to the next level. You may have a vision of what it can be and want to make that a reality. If that’s the case, there are two general approaches: organic growth and inorganic growth.
Organic vs Inorganic Growth
Growing a business from within is known as organic growth. You accomplish this by selling more products or services, increasing the number of products or services you offer, increasing the number of offices and locations you have, or a combination of these things.
The second approach, known as inorganic growth, is to grow through mergers or acquisitions. This is where you increase your market share, sales and profit by acquiring other companies with products or services you also want to offer or merging with competitors.
Organic growth usually requires less capital than inorganic growth because you use the cash coming in from your current sales to generate more sales.
Here are some examples of what you can do to generate organic growth:
- You can sell more of your products to existing customers, or you can increase the sales of the products or services you offer now by identifying and selling to new customers.
- You can add new products or services similar to those you offer now, or you can open new offices and locations in other areas of the United States or even in other countries. If you are based in one city now — say, Chicago — and all your customers are in Illinois, you might open an office in Boston or Atlanta and target new prospects in Massachusetts or Georgia.
- Another option is to increase your profit without increasing your sales by improving efficiency. Identify the parts of your operation that are not performing well and correct them.
On the other hand, if you decide to go the inorganic growth approach, you are most likely going to need additional financing.
Here are some examples of what you might do:
- To increase your market share immediately, you may want to look at merging with a larger competitor. Immediately, your market share increases.
- If you want to offer a new product or service, you may want to buy a business already offering it rather than developing it yourself.
- Your current marketing department may not be capable of doing the marketing necessary to generate the increased business desired to fuel your growth. But you can buy an existing marketing company capable of doing what is needed.
Advantages and Disadvantages of Organic and Inorganic Growth
Organic and inorganic growth both have advantages and disadvantages. Here are a few:
Organic Growth Advantages:
- Not as risky as external growth
- Usually requires lower amounts of capital
- Growth builds on your previous success
- Easier to control
Organic Growth Disadvantages:
- Difficult if the underlying market is not growing
- Slower growth, which can be frustrating
Inorganic Growth Advantages:
- Possible to see immediate gains in market share in existing markets
- Potential to quickly gain entry into new markets
Inorganic Growth Disadvantages:
- Usually requires significant capital investment
- High failure rate (usually due to culture mismatches)
- Can lead to power struggles between new and existing staff
- Often leads to an exodus of top talent
No matter what you do, you’re going to need a strong executive team.
If you choose organic growth:
- You need a plan.
- Each person on your team needs to take responsibility to see that the elements in the plan they are responsible for are carried out properly.
- You need a deep understanding of your markets and competitors.
- If you are going to add a new product or service, you need to develop the new product or service on time and within budget.
- If you are going to open new offices or operations in other cities, your point person responsible for that must have the appropriate people in the organization do the analysis and legwork to determine the best location(s), what the expected costs will be and the likely return on investment.
If you decide on inorganic growth, the requirements for you and your team are different:
- You still need a plan.
- You have to analyze what businesses would be best to merge with or acquire to accomplish your objectives.
- You need to determine the best person in your business to work out the details of the merger or acquisition. They will need support throughout the process.
- Once a merger or acquisition is finalized, the two formerly separate businesses will be consolidated into one. If the businesses have extremely different cultures, you and your team have to figure out how to make the transition go smoothly. Missteps along the way can have drastic consequences.
Inorganic growth is almost always more challenging than organic growth. Because of this, most businesses opt for organic growth. Ultimately, you and your executive team have to decide how to grow your business.
Expect — and encourage — lively discussion. At some point, it should become clear which approach is best for your business. Once you decide, finalize your plan and execute.
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