When a business grows organically, it uses its own resources and assets to expand, rather than using mergers and acquisitions or other takeovers. An emphasis on organic growth is valued by many executives and investors since it shows a long-term, solid commitment to building the business. This kind of growth can also be negative, as it can mean that the business is actually contracting. Investors look at organic growth numbers to see if a company is increasing sales and revenues and to assess if those increases are sustainable over the long term.
Organic growth shows how well management of a company is utilizing internal resources to increase sales and output. Mergers, acquisitions and takeovers can provide an artificial boost to a company's sales and revenue figures; this can cloud the picture of how the company is managing its resources. By focusing on organic growth, executives and investors can see exactly how the company is meeting its goals through its own internal means.
Many executives prefer to grow their companies organically due to the complexity and organizational issues that result from mergers and acquisitions. One major issue is the effect of merging two company's workforces, which can often result in culture clashes and morale issues. Employees can resist changes in the chain of command or workflow procedures, resulting in a high turnover. Organic growth allows the company to avoid these workforce issues entirely.
Organic growth allows company executives to set and achieve corporate goals in whichever manner they choose. Combining two companies often comes with the burden of sharing management responsibilities with executives from both firms; this can have an impact on the entire strategic outlook of the new company. A merger pursued as a way to achieve specific goals can wind up changing those goals completely. Executives stay in complete control of the company, when it is growing organically, and can steer the business in a specific direction to achieve their objectives.
Significance to Investors
Investors love organic growth, not only because it shows management's effective use of resources and commitment to the business, but also because it makes analyzing the company a lot easier. When looking at a company's financials, it is important to note if sales and revenue figures have been inflated due to recent acquisitions. Often, investors will strip out all non-organic growth from a company's financials, showing the true growth potential of the core company. The less a company relies on mergers and acquisitions, the less work an analyst has to do to get to this core figure.
Growing a company organically takes an enormous commitment of resources and time. Equipment must be acquired, personnel hired and trained and sales conduits established. Often, companies utilize mergers and takeovers to acquire a fully developed business unit and avoid reinventing the wheel. Organic growth also puts all of the business risk squarely on the core company, as opposed to a company that acquires a new unit, sharing the risk between the core company and the new addition.