Organic Business Growth
While many people are choosing to eat organic foods, businesses also have a similar option when it comes to choosing a growth strategy; organic growth, acquisitive growth, or a combination of the two. Like organic foods, many would agree that organic growth is more sustainable and provides less risk. There is also another benefit of organic growth that organic foods cannot claim; organic growth is typically less expensive than acquisitive growth.
They say that an apple a day, keeps the doctor away – does the same apply to businesses? Absolutely! Just look at Lego, Gillette, Under Armor, Guinness, and Green Mountain (Keurig) how they staved off ill health with successful long term organic growth. Too many times companies feel pressured to acquire other companies or constantly inflate their earnings to appease Wall Street, often falling short of their estimated earnings projections – Google/Nest, Microsoft/Nokia, and Google/Motorola to name a few.
Growing organically usually means expanding without relying heavily on mergers and acquisitions to generate added revenue. Mergers and acquisitions can often bring on complexity and organizational issues, which many executives want to avoid. But, unfortunately when times get tough, business executives often scramble to look for ways to grow revenue. In the long run, however, a business’ emphasis on organic growth is often more valued by many investors as it shows that leadership has a long term vision, superior knowledge of their served markets, the ability to develop and execute a strategic plan, a commitment to building the business, and have aligned their organization for success.
While inorganic growth is certainly a viable and often employed strategy, there are several unique benefits that accrue to companies that grow organically. First, an organic growth strategy tends to be less expensive and less risky than acquisitive growth, as the growth is usually funded out of retained profits. It is also easier to maintain a consistent culture with organic growth, as there is no disruption or clash in management style often associated with integrating acquired businesses.
Most organic growth strategies target one or more of the following options:
- Selling existing products to existing customers
- Selling existing products to new customers
- Developing new products and services
- Expanding to new industries
- Developing new business models
In a recent survey of companies exhibiting successful organic growth over the past 3 years, McKenzie identified the top 9 capabilities associated with their success; 5 of the top 9 were, understanding the customer experience, customer insights, and data analytics, developing new products and services, and branding. In looking across all 5 of these capabilities, a single “common thread” can be identified – market and customer insights. Without a deep knowledge of the market and the customers that make up the market driving the direction of these 5 capabilities, companies would fail.
The chart below provides some examples of the types of research and analysis needed to provide the data and insight required to develop a successful organic business growth strategy. Without this type of information, the foundation of any organic growth strategy would be built on assumptions and guesses.
There is certainly a role for acquisitions in companies fueled by organic growth, as they can provide a company a head-start for organic growth. When mergers and acquisitions are utilized in conjunction with an overall organic growth strategy, its purpose is often to acquire a customer base, establish a strategic geographic location, or to create distribution infrastructure. For example, Amazon’s acquisition of Whole Foods will serve to jumpstart the organic growth play of AmazonFresh, several analysts have said that Whole Foods’ urban and suburban locations are so valuable for Amazon’s delivery business that the deal could be worth it even if the grocer all but stopped selling food. The purchase accelerates the timeline and potential for success of Amazon’s e-business home delivery food platform.
Investors will look at organic growth numbers as an indicator of the sustainability of a company’s growth over the long term. This is the preferred method of growth for investors since organic growth is less disruptive to the organization’s culture, incorporates less risk, and typically less costly to achieve. It does not provide a quick fix, and it does not guarantee a consistent growth in revenue and profits every quarter – but like organic apples, it is a proven growth strategy that builds a solid foundation for long term business health.