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Organic Growth

The process by which a company expands of its own capacity

What is Organic Growth?

Organic growth is the process by which a company expands on its own capacity. In an organic growth strategy, a business utilizes all of its resources – without the need to borrow – to expand its operations and grow the company.

 

Organic Growth

 

Organic growth is typically marked by an increase in output, greater efficiency and speed with production, higher revenue, and improved cash flow. It is critical for the success of a company.

 

Three Primary Strategies for Organic Growth

There are three primary strategies that the majority of companies pursue in order to facilitate organic growth:

  1. Continual optimization of commercial activities, which involves how goods and services are priced, marketed, and sold
  2. Reallocating funds into activities – e.g., production of high-earning goods – that fuel earnings and growth
  3. Developing new models for operations or creating and developing new goods to sell and/or services to offer

 

Most companies choose to focus on one of the core strategies mentioned above to fuel organic growth, as pursuing more than one can make it less clear what actions within a strategy are working and which aren’t. Also, as growth typically requires significant expenditures, it may be difficult for a company to fund more than one growth strategy at a time.

A well-rounded company will likely adopt or practice all of the strategies at some point. However, they usually only attempt one strategy at a time. Generally, only the top-tier level companies opt to utilize more than one strategy at once. They are companies that typically own more resources at their disposal.

 

Organic Growth vs. Inorganic Growth

Inorganic growth, by comparison, is accomplished by using resources or growth opportunities outside of a company’s own means. It includes things like taking loans and entering into mergers and acquisitions. Inorganic growth almost always relies on securing outside capital or resources but may enable more rapid expansion. Organic growth, on the other hand, relies on intrinsic resources and skills to fuel a slower, more natural growth.

 

Organic Growth and Understanding a Targeted Client Base

One of the most fundamentally sound things a company can do to fuel organic growth is to understand its target market. Consistent research into the way the target customers/clients think and make decisions helps a company understand where to invest the majority of their funds (into the goods and services most purchased), what new products or services the target clientele would enjoy and use, and tailoring the marketing and pricing of products and services toward the clientele who are most frequently patrons.

 

Final Word

Organic growth is ultimately often more difficult to come by because it takes longer and it usually requires a shift in how the company operates. Still, organic growth is arguably better in the long term because it prevents the loss of a company as an independent entity (versus a merger or acquisition) and it also prevents a company from taking on substantial debt (through loans or borrowed resources).

 

More Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Capital Structure
  • M&A Considerations and Implications
  • Organizational Analysis
  • Present Value of Growth Opportunities (PVGO)

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