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In This Article
Meaning Of Organic Growth
Growth achieved through organic means such as increasing sales revenue through increased volume of products sold, achieving greater operational efficiency leading to a reduction in the cost of production or any other internal improvement such as increased marketing and sales efforts are all examples of organic growth. There are no incremental revenue and profit accruing from the acquisition of external companies included in this figure.
An organic growth strategy is one that seeks to maximize growth from within the organization. There are a variety of methods by which a company can increase sales within its own internal organization. These strategies are typically implemented in the form of optimization, reallocation of resources, and the introduction of new products and services.
A business's process optimization efforts are focused on continuing to improve a company's processes in order to reduce costs and establish appropriate pricing strategies for products and services. Reallocation of resources is the process of allocating funds and other materials to the production of the best-performing products, whereas new product offerings are the process of expanding a company's product offerings in order to increase profits and overall growth.
Entrepreneurs who choose organic growth can keep control of their businesses, whereas those who choose merger or acquisition risk having their control diluted or stripped away. However, organic growth takes more time because it is a more time-consuming process to acquire new customers and expand business relationships with existing customers. A combination of organic and inorganic growth is ideal for a company because it diversifies the revenue base and prevents the company from relying solely on current operations to increase its market share.
Strategies for Organic Growth
1) Increase in Sales Revenue-
In order to sell more units at the same price, it is necessary to increase product awareness through sales promotion and marketing campaigns. Demand may be increased as a result of increased investment in advertising by a developing brand.
Selling the same units at a higher price by creating new segments of the market, for example, the snacks sold in multiplexes, is one method of accomplishing this goal.
Additionally, it can be accomplished by exploring additional geographical areas, such as rural areas or international sales opportunities. In order to achieve growth, one method is to have an impact on the top line.
2) Reducing Cost-
When it comes to the production of goods and services, there are many different types of costs involved. Material costs, labor costs, and overhead costs are three broad categories for the same.
Maintaining the ability to source raw materials at a low cost by establishing a vendor network is one method of keeping material costs under control.
Another method of cost-cutting is to hire more contract labour in accordance with regulatory requirements. In addition to lowering transportation costs, locating the plant close to the source of raw materials can lower production costs.
People have also reduced their use of office space in recent years, owing to the fact that a great deal of work can be done online. Shared working spaces are becoming increasingly popular among businesses looking to reduce their fixed costs.
3) Improving Operational Efficiency-
This can be accomplished by providing periodic training to the operations personnel in order to increase the marginal productivity of labour while also increasing the value added by each individual labourer.
Pros and cons of organic growth
Pros-
Growth that is significantly faster than organic growth
Assets that have grown as a result of acquiring another business or opening a new location
Market presence in existing or new markets is being expanded.
Competitive advantage as a result of the additions made as a result of a merger or acquisition Potentially stronger credit as a result of the increased size of the company
Mergers and acquisitions bring with them the knowledge and experience of new employees.
The diversification of a business model is the result of expanding into a new geographic area or business type.
Economies of scale are advantageous to a larger organisation.
Tax advantages may be available.
Cons-
Investing in a different business or location can be a risky proposition.
Upfront costs can be substantial, necessitating additional funding.
The addition of a new business or location can present new management challenges.
It is possible that business will move in an unexpected direction.
The company as a whole will be larger, which may make some businesses less adaptable in the future.
It is possible to grow at a faster rate than anticipated and be unable to scale effectively.
Long-term growth of a newly acquired company may necessitate careful financial planning in order to integrate smoothly.
Difference between Organic Growth and Inorganic Growth
In order to achieve organic growth, either sales revenue must be increased or costs must be reduced in order to achieve greater profits. It is possible to achieve organic growth through mergers and acquisitions carried out by a large corporation when it believes that the acquisition of a specific smaller player will result in synergies or assist in diversifying the company's product line.
In order for a company to be successful at its infancy stage, organic growth must be achieved. Inorganic growth can only occur as a result of continuous growth. No company exists solely for the purpose of acquiring other businesses. That is the motivation of a retail investor who makes a purchase of a company's stock stock. An investor with a control perspective must have a compelling reason for entering the inorganic growth business model.
The brand's organic growth occurs gradually over time as the brand becomes more established. When an acquisition is not a hostile takeover, inorganic growth can be accomplished relatively quickly because both the acquirer and the target have achieved some level of organic growth. If it is not a hostile takeover, it is a consensual interaction, which can be accomplished relatively quickly.
Final Conclusion
As a result, we recognise that organic growth can be achieved by increasing sales while simultaneously decreasing costs and increasing efficiency. It leads to the development of a brand, but it is a time-consuming process. Success is achieved after a lengthy gestation period, but once success is achieved, it lasts for decades and, in some cases, for centuries, making it a high-risk investment with a high return profile.
However, we must also recognise that it comes to an end when the product or the company reaches saturation level of demand. From this point forward, the company must choose between diversification and integration. The achievement of these goals can be accomplished either internally or through organic growth channels.