Organic growth occurs when a firm expands its operations using existing resources, rather than by merging with or acquiring another company. Achieving organic business growth generally means that a company has successfully been able to boost its size, output, or revenue by growing the business or developing a new one. This is in contrast to inorganic growth, which occurs through the acquisition of other companies.
There are pros and cons to both growth strategies. Here’s a closer look at organic growth, including how it works, how it compares to inorganic growth, plus strategies that can help you expand your small business through organic growth.
What Is Organic Growth in Business?
By definition, organic growth is growth that a firm achieves from within by harnessing internal resources. To attain this type of growth, a business typically needs to have a well-thought-out business plan and strong leadership.
Strategies business owners often use to foster business expansion through organic growth include optimizing processes to reduce costs, improving their existing product/service mix, enhancing their sales and marketing strategies, expanding into new markets, and developing new products and services.
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How Does Organic Growth Work?
Organic growth works by making the most of a firm’s existing assets and resources, including skills, knowledge, experience, relationships, and other tools. Often, it comes down to thinking creatively about how best to leverage what you own and how you do business. Some business owners prefer to grow their businesses via organic rather than inorganic growth because it allows them to maintain control of their company (which might not be the case with a merger or acquisition).
It can sometimes be challenging, however, to achieve rapid growth through internal growth strategies alone. For example, if your company needs to pivot quickly due to a sudden change in consumer preferences, it might take more time and money to launch a new product line yourself rather than acquire a company that already has that product.
Inorganic vs Organic Growth
Here are some of the key ways that organic growth differs from inorganic:
| Organic Growth | Inorganic Growth |
|---|---|
| Uses internal resources | Uses outside resources |
| Requires tapping internal talent and optimizing business processes | Requires entering into a merger or acquisition |
| Does not require large sums of new capital | Typically requires outside financing |
Organic growth happens when a firm uses inside opportunities to grow. Inorganic growth, on the other hand, involves using resources outside of the company, such as taking on debt and engaging in mergers and acquisitions.
While inorganic growth typically involves taking out small business loans, it can allow for faster expansion than organic growth. Organic growth, by contrast, tends to occur slowly and naturally. It relies on internal skills and resources, and may not require taking on any debt.
Investment Analysis
When investors and lenders analyze a company’s financial health, they generally like to see growth of any kind. However, how a company achieves growth may also come into play. If a business grows inorganically through a merger or acquisition, for example, analysts may want to make sure that the company they acquired made sense and is related to their core business and that they aren’t stretching themselves too thin.
Generally, analysts like to see a mix of organic and inorganic growth strategies. A company that is generating growth by maximizing their core business, while also boosting revenue through strategic acquisitions, may find it easier to attract investors or get approved for different types of financing.
Pros and Cons of Organic Growth
Here’s a closer look at the advantages and disadvantages of organic growth:
| Pros | Cons |
|---|---|
| Offers a steady and predictable path towards reaching your business goals | Organic growth can stagnate |
| Allows you to retain control of your business and stay true to your vision | You may struggle to keep up with changing market demands |
| Often lower risk and more sustainable than growing via acquisition | May lose talent to larger businesses |
| Avoids the large upfront cost that comes with acquisition | Takes longer than growing via acquisition |
Pros and Cons of Inorganic Growth
Next, consider the upsides and downsides of inorganic growth:
| Pros | Cons |
|---|---|
| Proven method of business growth | Requires a large financial commitment |
| Can enable rapid growth | You may need to put business or personal assets at risk to secure financing |
| Allows you to take over a proven business model with customers and systems already in place | Deals can be time-consuming |
| Increasing your business size can make it easier to access additional capital for further growth | Merging workforces can lead to friction |
Measuring Organic Growth
You can measure organic growth by looking at your company’s key financial statements — the income statement, balance sheet, and cash flow statement.
The income statement shows your company’s profit (or loss) for a specific time period. The balance sheet provides a snapshot of your business’s financial health, measuring how much you owe and own at a specific point in time. And, the cash flow statement sums up the amount of cash that enters and leaves your business.
Generally, if your profits are growing year over year, that’s a sign that you are experiencing organic growth.
Organic Growth Strategies
There are numerous strategies a small business can use to foster organic growth. Here are some to consider.
• Investing into existing products or services
• Developing new products or services through research and development (R&D)
• Enhancing your sales and marketing strategies
• Targeting customer profiles and pricing structure
• Launching a rebranding initiative
• Restructuring the organization and its processes
• Cutting costs
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Inorganic Growth Examples
Here’s a look at some common ways that businesses can achieve inorganic growth.
• Combining with a similar company to increase market share
• Acquiring a company that has products, services, and/or a customer base that your company wants to have
• Merging with a dissimilar company to create a conglomerate
• Opening in a new location to bring in customers in a geographical area where you’re not currently represented
The Takeaway
Organic growth refers to the growth of a business through internal processes, utilizing its own resources. Businesses often grow organically by optimizing processes, reallocating resources, and adding new products or services. It contrasts from inorganic growth, which is often accomplished through dealmaking to acquire other companies and products. Either approach may involve outside financing. However, inorganic growth generally requires significantly more capital than organic growth.
If you’re looking to finance business growth, you likely have an array of options.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are some examples of organic growth?
Examples of organic growth strategies include investing into existing products and services, developing new products and services, reallocating resources, making improvements to your business model, and adjusting pricing.
Is getting organic growth harder than inorganic?
It can be. Organic growth in business requires thinking about existing assets and resources in new ways, and it may be some time before you reap any rewards. Growing inorganically through a merger or acquisition, however, also comes with challenges. It requires a large amount of capital, can be time-consuming, and, by merging workforces, can lead to friction.
Is organic growth better than inorganic growth?
There’s no one answer since each growth strategy has pros and cons. Organic growth offers a steady and predictable path towards growth, and allows you to retain control of your business. However, it requires a lot of time and effort, and has the potential to stagnate. Also, it may not be the right choice if you need to pivot quickly to keep up with changing market demands.
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