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Understanding and Harnessing Organic Growth

What Is Organic Growth? How Is It Created?
Mike Zaccardi
Mike ZaccardiUpdated March 1, 2023
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Organic growth occurs when a firm expands its operations using existing resources, rather than by merging with, or acquiring, another company. Achieving organic business growth generally means that a company has successfully been able to boost its size, output, or revenue by growing the business or developing a new one. This is in contrast to inorganic growth, which occurs through the acquisition of other companies.There are pros and cons to both growth strategies. Here’s a closer look at organic growth, including how it works, how it compares to inorganic growth, plus strategies that can help you expand your small business through organic growth.

What Is Organic Growth in Business? 

By definition, organic growth is growth that a firm achieves from within by harnessing internal resources. To attain this type of growth, a business typically needs to have a well-thought-out business plan and strong leadership. Strategies business owners often use to foster business expansion through organic growth include optimizing processes to reduce costs, improving their existing product/service mix, enhancing their sales and marketing strategies,  expanding into new markets, and developing new products and services.  Recommended: How to Write a 5-Year Business Plan 

How Does Organic Growth Work? 

Organic growth works by making the most of a firm’s existing assets and resources, including skills, knowledge, experience, relationships, and other tools. Often, it comes down to thinking creatively about how best to leverage what you own and how you do business. Some business owners prefer to grow their businesses via organic rather than inorganic growth because it allows them to maintain control of their company (which might not be the case with a merger or acquisition). It can sometimes be challenging, however, to achieve rapid growth through internal growth strategies alone. For example, if your company needs to pivot quickly due to a sudden change in consumer preferences, it might take more time and money to launch a new product line yourself rather than acquire a company that already has that product.

Inorganic vs Organic Growth 

Organic GrowthInorganic Growth
Uses internal resourcesUses outside resources
Requires tapping internal talent and optimizing business processes Requires entering into a merger or acquisition
Does not require large sums of new capitalTypically requires outside financing
Organic growth happens when a firm uses inside opportunities to grow. Inorganic growth, on the other hand, involves using resources outside of the company, such as taking on debt and engaging in mergers and acquisitionsWhile inorganic growth typically involves taking out small business loans, it can allow for faster expansion than organic growth. Organic growth, by contrast, tends to occur slowly and naturally. It relies on internal skills and resources, and may not require taking on any debt.

Investment Analysis 

When investors and lenders are analyzing a company’s financial health, they generally like to see growth of any kind. However, how a company achieves growth may also come into play. If a business grows inorganically through a merger or acquisition, for example, analysts may want to make sure that the company they acquired made sense and is related to their core business, and they aren’t stretching themselves too thin.Generally, analysts like to see a mix of organic and inorganic growth strategies. A company that is generating growth by maximizing their core business, while also boosting revenue through strategic acquisitions, may find it easier to attract investors or get approved for different types of financing.

Pros and Cons of Organic Growth 

Offers a steady and predictable path towards reaching your business goals Organic growth can stagnate
Allows you to retain control of your business and stay true to your visionYou may struggle to keep up with changing market demands
Often lower risk and more sustainable than growing via acquisition May lose talent to larger businesses
Avoids the large upfront cost that comes with acquisitionTakes longer than growing via acquisition

Pros and Cons of Inorganic Growth

Proven method of business growthRequires a large financial commitment
Can enable rapid growth You may need to put business or personal assets at risk to secure financing
Allows you to take over a proven business model with customers and systems already in placeDeals can be time-consuming
Increasing your business size can make it easier to access additional capital for further growthMerging workforces can lead to friction

Measuring Organic Growth 

You can measure organic growth by looking at your company’s key financial statements — the income statement, balance sheet, and cash flow statement.  The income statement shows your company’s profit (or loss) for a specific time period. The balance sheet provides a snapshot of your business’s financial health, measuring how much you owe and own at a specific point in time. And, the cash flow statement sums up the amount of cash that enters and leaves your business.Generally, if your profits are growing year over year, that’s a sign that you are experiencing organic growth.

Organic Growth Strategies 

There are numerous strategies a small business can use to foster organic growth. Here are some to consider.
  • Investing into existing products or services
  • Developing new products or services through research and development (R&D)
  • Enhancing your sales and marketing strategies
  • Targeting customer profiles and pricing structure
  • Launching a rebranding initiative 
  • Restructuring the organization and its processes
  • Cutting costs
Recommended: 9 Tips for Running a Successful Small Business 

Inorganic Growth Examples 

Here’s a look at some common ways that businesses achieve inorganic growth.
  • Combining with a similar company to increase market share 
  • Acquiring a company that has products, services, and/or a customer base that your company wants to have
  • Merging with a dissimilar company to create a conglomerate
  • Opening in a new location to bring in customers in a geographical area where you’re not currently represented 

The Takeaway

So what exactly is organic growth in business? Organic growth refers to the growth of a business through internal processes, utilizing its own resources. Businesses often grow organically by optimizing processes, reallocating resources, and adding new products or services. It contrasts from inorganic growth, which is often accomplished through dealmaking to acquire other companies and products. Either approach may involve outside financing. However, inorganic growth generally requires significantly more capital than organic growth.

3 Small Business Loan Tips

  1. Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can find recommended small business loans by using Lantern by SoFi.
  2. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
  3. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.

Frequently Asked Questions

What are some examples of organic growth?
Is getting organic growth harder than inorganic?
Is organic growth better than inorganic growth?
Photo credit: iStock/alvarez

About the Author

Mike Zaccardi

Mike Zaccardi

Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.
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