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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 increased 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.
Key Points
• By definition, organic growth is growth that a firm achieves from within by harnessing internal resources.
• Organic growth works by making the most of a firm’s existing assets and resources.
• While organic growth happens when a firm uses inside opportunities to grow, inorganic growth involves using resources outside of the company.
• Generally, analysts like to see a mix of organic and inorganic growth strategies.
• You can measure organic growth by looking at your company’s key financial statements.
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.
Organic growth may require raising capital, such as through a business loan or a silent partner agreement.
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 than to acquire a firm that already has the right product.
Recommended: Stages of Business Growth
Inorganic vs Organic Growth
Here are some of the key ways organic growth differs from inorganic growth:
| 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 internal 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 it makes sense to acquire the company, that it is related to its 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 its 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:
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Pros:
• Offers a steady and predictable path towards reaching your business goals
• Allows you to retain control of your business and stay true to your vision
• Often has lower risk and is more sustainable than growing via acquisition
• Avoids the large upfront cost that comes with acquisition
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Cons:
• Can stagnate
• May be difficult to keep up with changing market demands
• Potential loss of talent to larger businesses
• Takes longer to grow than via acquisition
Pros and Cons of Inorganic Growth
Next, consider the upsides and downsides of inorganic growth:
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Pros:
• Proven method of business growth
• Can enable rapid growth
• Allows you to take over a proven business model with customers and systems already in place
• May make it easier to access additional capital for further growth with a bigger business
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Cons:
• Requires a large financial commitment
• May require putting business or personal assets at risk to secure financing
• May involve deals that are time-consuming
• Possible friction due to merged workforces
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. 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, it’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 in existing products or services
• Developing new products or services through research and development
• Enhancing your sales and marketing strategies
• Targeting customer profiles and pricing structure
• Launching a rebranding initiative
• Restructuring the organization and its processes
• Cutting costs,
Recommended: How Much Does It Cost to Start a Business
Inorganic Growth Examples
These are 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 is the opposite of inorganic growth, which is often accomplished by acquiring other companies or products through dealmaking. 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 in existing products and services, developing new products and services, reallocating resources, making improvements to your business model, and adjusting pricing.
Is organic growth harder to achieve than inorganic growth?
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 can lead to friction when workforces are merged.
Is organic growth better than inorganic growth?
There’s no absolute answer since each growth strategy has pros and cons. Organic growth offers a steady and predictable path toward growth and allows you to retain control of your business. However, it requires a lot of time and effort and may 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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