Many owners dream of growing their small businesses into larger ones. Getting there involves loads of decisions to make along the way. But one of the most fundamental is how you’re going to grow your small business.
Organic vs Inorganic Growth
One way is to generate growth organically, which includes building your revenue and bottom line by increasing your customer base, reinvesting profits and improving efficiency. Put simply, organic growth involves actions your small business can take internally to take you to the next level.
These “actions” may involve doing things such as strengthening the skills of your management team, marketing new products and services, and training your salespeople so they can close more deals.
The other way to grow is through merging with or acquiring another company, which is often referred to as inorganic growth. This can quickly increase your customer base and give you entirely new channels that can accelerate the growth of your business.
Small Business Growth Patterns
Business consultants Karl Stark and Bill Stewart say that, based on their work with client companies, they’ve noticed that a distinct pattern emerges in how different size businesses approach growth.
Small companies, they say, typically view business building as a “do-it-yourself” organic approach, while large companies tend to turn to acquisition. But the reality, they say, is that companies of any size should be able to successfully do either one. The key is building and basing the growth strategy on the right business case.
As a thought starter, smallbusiness.chron.com takes a look at some of the advantages and disadvantages of organic and inorganic growth, respectively.
Advantages of Organic Growth vs Advantages of Inorganic Growth
When you grow your business yourself (organic growth), you know the company inside and out and have the satisfaction of seeing your vision come to life. You can control your rate of growth and may even decide to sell the business when it’s reached a certain size.
On the other hand, if you merge with or buy another business (inorganic growth), your market share and assets are immediately larger. Your new, expanded business is more valuable, which may make it easier for you to get capital when you need it. You may also benefit from the skills and expertise of added staff members.
Disadvantages of Organic Growth vs. Disadvantages of Inorganic Growth
Should you elect organic growth, growing your business on your own can limit your resources, or you might find that you can only grow to a certain point. Competition and other market factors are constant threats to your strategy, and keeping your cash flow going year after year tends to be a never-ending challenge. You also have to keep marketing and selling in order to keep growing in an organic fashion.
However, if you’ve merged or acquired to obtain inorganic growth, you’re suddenly big and need to ramp up your capabilities and systems immediately—there’s just a lot more to manage. You could be headed in new directions, which means a steep learning curve, and you may not be able to control the rate at which you’re growing. You’ll definitely have financing debt, and correctly calculating how you’ll service that debt from your new growth is critical to staying solvent in inorganic growth situations.
Which Is Best: Organic Growth or Inorganic Growth?
So, how do you know which growth strategy is best for you? Because both organic growth and inorganic growth have advantages and disadvantages, Stark and Stewart outline the steps involved in one possible approach on inc.com.
- Define your “burning platform.” The authors say that a change in your customer preferences or competition—causing changes in your actual business model—can provide a “burning platform” on which to build a new business.
- Outline the case for an organic build. This may be the cheapest or most flexible route but may not be the best. You’ll need to ask yourself a number of specific questions having to do with opportunities for the new business model and how you’ll leverage them.
- Outline the case for an inorganic build. Likewise, while merging or acquiring may be a faster and more valuable way to build your business, you need to explore specific questions here, too, including doing financial and organizational cost-benefit analyses for this approach.
- Align on an action plan. This means detailing a clear path that addresses things like accountability and decision making.
Again, the authors stress that defining and pursuing the best growth strategy for your business—organic, inorganic or even a hybrid approach—all depends on asking the right questions.
Questions to Ask When Deciding Between Organic Growth and Inorganic Growth
So, what are the right questions to ask? Here are a few that need to be asked (and answered) when trying to decide whether you’re going to pursue organic growth, or if inorganic growth offers more advantages based on your business situation and needs.
- Are there any other products or services you could offer that you don’t already? If so, do you have the tools necessary to do it in-house or would you need to acquire or merge with other companies?
- Is there a segment of your industry that remains relatively untapped, enabling you to corner it? If so, could you do it with organic growth or would inorganic growth be necessary?
- Should you decide to inorganically grow your business, what opportunities do you have regarding mergers and acquisitions? Are there companies locally or would you have to expand your reach nationally or internationally?
- How much capital do you have to work with? What are your funding options?
- Similarly, what are the costs associated with organic growth? What about the costs associated with inorganic growth?
- Would the growth—whether organically or inorganically—require the hiring of more personnel? If so, who and what positions? If not, who would take over the additional responsibilities associated with the growth?
Answer these types of questions and your decision should be a whole lot easier. At a minimum, it will at least be more informed.