Setting a Trajectory: Organic vs. Inorganic Growth

Growth is a driving factor for all companies — whether they are one year old or a hundred years old.

There are two key ways to achieve growth: organically or inorganically. While both strategies seek growth, they vary based on available resources and speed of expansion. Deciding between organic growth and inorganic growth (a.k.a. build or buy strategies), is not a one-time decision. Instead, it requires constant evaluation of the company, the state of the industry, the state of the private capital markets, and your personal business objectives.

Below is a discussion of the two strategies and when to consider each:

Organic Growth

Organic growth is a strategy that focuses on using internal resources to increase revenues and output. Long-term organic growth requires good management, effective planning, and a deep understanding of the customers and industry being served.

The dependency on internal resources can be viewed as either a benefit or drawback for many companies seeking organic growth. On one hand, using only internal resources means a company is growing at a very controlled pace and can quickly navigate through different market cycles and turns. On the other hand, growth contingent on available internal resources means that a business is likely to have slower, incremental growth.

Organic growth is usually the preferred strategy of businesses that are comfortable with the more controlled progression, and still have defined market share to win.

Inorganic Growth

Inorganic growth focuses on achieving expansion through mergers or acquisitions.

One of the key benefits of this strategy is its ability to deliver very substantial changes to a business in a very short amount of time. Most often, inorganic growth is pursued by businesses looking for new employees, new products, or new markets. A smart, well-executed merger or acquisition can help achieve each of these goals — or all three simultaneously.

For example, a business that is looking to develop a stronger presence in Europe might consider acquiring a UK-based competitor to quickly establish a presence in the geography rather than slowly attempting market penetration. Or, a company that is want for engineering talent might complete an “acqui-hire” and buy a competitor for its deep engineering talent. The inorganic strategy allows business owners to “buy” their desired solution, rather than “build” it in-house.

The inorganic strategy often makes sense for near-retirement business owners that are looking to maximize the value of their business before sale. If a business owner is planning to sell in five years, a well-positioned acquisition might boost revenues and market position, yielding a significantly higher valuation from an investor.

Pursuing a merger or acquisition will entail some level of risk — primarily the business expanding too quickly, loss of focus, or cultural integration issues — but can be extremely successful with proper preparation and post-merger integration.

Weighing the Options

It is important to note that nearly any business can pursue either strategy. Although many smaller businesses do not believe that acquisitions are appropriate for them, this is not the case. New tools — like Axial — help business owners best assess their acquisition prospects and find the best partners to achieve the strategy.

When deciding between organic or inorganic growth strategies, the most important factors are timing and goals. By consulting with senior management teams, board of advisors, and trusted peers, business owners can determine when and how to pursue either strategy.