Introduction
Organic growth is the process of business expansion due to increasing overall customer base, increased output per customer or representative, new sales, or any combination of the above, as opposed to mergers and acquisitions, which are examples of inorganic growth. Typically, the organic growth rate also excludes the impact of foreign exchange, and it can be negative.
Growth including foreign exchange, but excluding divestitures and acquisitions, is often referred to as core growth.
Organic growth figures are adjusted for the effects of acquisitions and disposals of businesses. Organic growth does include growth over a period that results from investment in business the company owned at the beginning of the period. What it excludes is the boost to growth from acquisitions, and the decline from sales and closures of whole businesses.
When a company does not disclose organic growth numbers, it is usually possible to estimate them by estimating the numbers for acquisitions made in the period being looked at and in the previous year. It is useful to break down organic sales growth into that coming from market growth and that coming from gains in market share: This makes it easier to see how sustainable growth is.
Creating Organic Growth
Kuerig
The introduction of the Kuerig coffee maker, which brewed a single cup of coffee at a time, led to tremendous organic growth for it's creator, Green Mountain Coffee.
A company can take various actions to create organic growth including:
- Changing the price–more customers tend to buy cheaper products.
- Advertising and promoting–people are more likely to buy a product if informed, reminded, or persuaded about benefits of product.
- Producing improved or better products–market research, innovation, new product design (more appealing).
- Selling in different locations (placement)–more locations increases potential for more customers and more sales.
- Offering customers preferential credit payment terms–the ability of customers to "buy now and pay later. "
- Increasing capital expenditure (investment)–new locations, introduction of new production processes/technologies to improve productive efficiency (investment appraisal required).
- Improving training and development is important especially for sales staff with knowledge (increase customer loyalty and high sales).
Implementing these measures may seem like an easy thing to do. However, there are a large number of companies that used to experience high internal growth that have become examples of low-growth companies. One of the reasons for this result could be the acceptance of a company's fate as it matures. Instead of implementing these steps to generate internal growth, companies simply accept their "fate" and look for growth opportunities outside of the the company (inorganic growth). In doing so, they could be making a big mistake.
Advantages of Organic Growth
Organic growth gives corporations:
- Better control and coordination: Firms maintain control whereas external methods lead to loss of control and ownership.
- Relatively inexpensive: The source comes from retained profits, less risk as the amount of capital involved is relatively lower than external.
- The ability to maintains corporate culture: No problems related to culture clash that might arise in acquisition environments.
Limitations of Organic Growth
In spite of the advantages of organic growth, when compared to external growth, there are still some limitations associated with relying on this type of growth. They include:
- Diseconomies of scale: Hierarchical structures may increase communication problems, and there may be slow decision making.
- Overtrading: If a business grows beyond its means (took too many orders, unable to control costs/manage human resources).
- Need to restructure: When a firm grows, there is a need to restructure (requires times, effort, money), communications will need to be handled with more care, and there is a need for training/retraining/updating the set of skills for staff.
- Dilution of control and ownership: If a company grows from partnership to public limited company, the original owners may need to share decision making with new owners (shareholders), and there may be prolonged decision-making and conflict of interest between shareholders.
- Specialist managers will need to be hired as the workforce expands.
- Delegation of decision-making powers to managers (reducing control of original owners) will take place.