Definitions and meanings:
Organic growth refers to the growth of internal revenues of a company, which is a result of increase in internal output of a company. Such type of growth lacks diversification of business risks.
Inorganic growth refers to the growth of revenues of a company by expansion, mergers and/or acquisitions. Such growth can result in diversification of business risks.
Difference between organic and inorganic business growth:
The important points of difference between organic and inorganic business growth are given below:
Management issues:
When a company undergoes organic growth, the management of that company is already trained and knows the strategies and procedures based on which the company is run.While, in inorganic growth the management of two companies take time to adapt and adjust with the culture and norms of each other. This can lead to integration issues for administration of both companies.
Cost:
Organic Growth is cheap. This is because it is generated internally and the business gradually increases its span of activates. Whereas inorganic growth demands a massive upfront cost, because whether it is a merger or acquisition the parent company has to incur costs in order to buy interest in the target company.
Market diversification:
A company which follows a path of organic growth faces more problems when entering into a new market segment as the company needs both the financial and human resources which are relevant as a new entrant. However, contrary to this inorganic growth provides a solution in this regard. A business can easily breach barrier to entry in a new market by buying an existing player. Especially, if the business is a multi-national organization, this approach is very effective to avoid any red tape and bureaucracy regarding the listing and registration of a new company in that potential market.
Business model:
The inorganic growth is a faster method for a business to grow. The main focus of this type of growth is to obtain an inflated level of output and a decreased level of costs. Whereas, the primary focus of organic growth is to increase the current capacity of business operations, largely by investing in new and innovative technology to acquire market competitive edge over rival businesses.
Brand image:
Inorganic growth is a useful tool to acquire an already established brand name or trademark. This brand name or trademark is considered an intangible asset of the business and can be written in financial books of the acquirer. This is because a business cannot register internally generated goodwill or brand name in their financial statements as assets. Additionally, internally generated brand name is established slowly which is contrary to acquired brand name, goodwill or trade mark under a merger or acquisition.
Conclusion:
Businesses can be run organically in a very efficacious manner if the operations (especially supply chain) of business are smooth, the customer base is strong and the services are market competitive. Yet, the increased diversification in the corporate world of modern era has made mergers and acquisitions inevitable even if these are carried out on a smaller scale. Because, this approach not only have cost savings but carry benefits of economies of scale, enhanced debt capacity and enhanced synergies.
