Organic Growth
Occurs when companies expand based on their capability and capacity.
What Is Organic Growth?
Organic growth occurs when companies expand based on their capability and capacity. This is done by utilizing their resources through organizational expertise, experience, reputation, capability, and visibility.
Such growth is important to help a company increase its output, generate higher revenue, improve efficiency, and more. In order to achieve this growth, companies look at the following:
1. Researching a target customer
Professional services firms often clearly understand their target customer base and what drives their decision-making capabilities.
Such insights help companies better position themselves and develop a competitive advantage.
2. Focus on a niche
Working towards a well-defined niche allows companies to reduce marketing costs and competition while increasing their market share. Studies show that high-growth firms are 75% more likely to focus on a niche.
3. Develop a Unique Selling Point
A Unique Selling Point (USP) is a feature or benefit that a company provides to set itself apart from the competition.
USPs require companies to have clear and defined differentiators, allowing them to address the needs and concerns of customers. These include provable claims about how unique services or expertise can benefit the customer.
4. Expanding marketing capabilities
Companies need to ensure that their marketing techniques fit the target audience's needs.
High-growth firms also monitor their marketing efforts by closely monitoring 33% more variables, such as new clients, revenue, and profitability, than their slow-growing peers.
5. Increasing visibility
In a professional services firm, the main product to be sold is their collective expertise, making it a key differentiator for the company.
Therefore a challenge that many firms have is making their expertise visible. This is often solved by carefully targeted and constructed marketing campaigns.
Key Takeaways
- Such growth occurs when companies expand based on their capability and capacity.
- It comes from expanding an organization’s output and engaging in internal activities, which help increase its revenue.
- Inorganic growth, on the other hand, comes when firms grow through mergers or acquisitions.
Organic Growth Strategies
Share-price performance of over 550 US and European companies between 1996-2011 revealed that companies with more organic growth generated higher shareholder returns than those with inorganic growth strategies.
The continual optimization of commercial activities strategy involves how goods and services are priced, marketed, and sold.
Companies can optimize their commercial activities by fostering agile working methods supported by a culture of continuous learning and improvement.
This is done by establishing performance metrics that incentivize employees to work quickly.
Next, reallocating funds into activities like increasing the production of high-margin products helps companies fuel their earnings and growth.
Many companies focus their organic growth efforts on their most loyal customers, though this often offers them the smallest returns as they already have most of their business.
The significant organic growth opportunity is with non-loyal customers who freely and frequently switch between competitors. Therefore, getting more business from non-loyal customers is an excellent opportunity for companies.
A study to understand the relationship between growth and profitability found that professional services firms which conduct frequent research on their customers grow 70% faster and are close to 50% more profitable than firms that do not.
A well-rounded company would attempt to adopt all the strategies but only consider one strategy at a time, depending on its size and scale.
Organic Growth vs. Inorganic Growth
Growth is considered either organic or inorganic. Organic growth comes from expanding an organization's output and engaging in internal activities, which help increase its revenue.
Inorganic growth, on the other hand, comes when firms grow through mergers or acquisitions.
The benefits of organic growth are:
1. Management knows the company
In tight-knit organizations, management knows the company's operations better than an acquirer if the organization has undergone a merger or acquisition.
This helps the company quickly and more effectively adapt to changes in the marketplace.
2. Fewer integration challenges
During a merger or acquisition, key employees often restructure, and operational structures occur to integrate the new business.
In organic growth, such integration challenges are typically more gradual. Moreover, they do not tend to affect the company's culture or governance, as entrepreneurs have more control over the direction in which the business is headed.
3. More Sustainable
Sustainable growth in terms of scalability and revenue is significant for a company. However, if no organic growth is involved, it will generate little investor interest.
Some drawbacks of organic growth are:
1. Slower Growth
As there is no capital or growth through acquisitions, organic growth leads companies to grow slower, where the growth rate cannot exceed the capabilities of the personnel, support services, and resources available.
2. Decrease competitive positioning
If competitors are growing quickly through inorganic growth via mergers or acquisitions, then growing too slowly could position you at a disadvantage.
On the other hand, some benefits of inorganic growth are:
1. Faster growth rate
Many businesses significantly increase the number of customers they work with at a much faster pace with inorganic growth through mergers or acquisitions than organic growth.
2. Immediate increase in market share
With inorganic growth, companies can take advantage of the acquired firms' prior sales and relationships, allowing them to gain markets and clients they otherwise may not have access.
3. Increased knowledge and expertise
By combining two companies' resources, greater knowledge and expertise are gained, leading to stronger decision-making capabilities.
New resources, assets, and market share means that inorganic growth sets a new pace for growth that can give a company strategic advantages in terms of pricing, purchasing, volume, and overall reach.
Here are some of the drawbacks of inorganic growth:
1. High cost
Funding an M&A transaction usually means a sizable upfront cost incurred by the acquiring company.
Without significant capital, companies would take on debt, making such acquisitions less attractive to investors or leading to further complications such as the inability to pay back the debt.
2. Management challenges
Mergers and acquisitions can generate complexities associated with scaling operations, such as systems, sales, and support.
This could include the company cultures being too different or operations not adapting to the changes in employees, resources, or sales, leading to complications for the business.
To conclude, companies look to undergo organic growth for various reasons based on their capability and capacity. These reasons could include developing a USP, increasing visibility, expanding market capabilities, and more, though some challenges related to this strategy are slower growth rates and decreasing competitive positioning.
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