Organic growth occurs naturally — or as naturally as business growth can occur. Unlike heavily-leveraged and publicly-traded companies, which rely on outside sources of funding and complex mergers to build upon their foundations, organic growth companies create their own opportunities. Organic growth may take longer than core growth, or expansion through outside acquisitions, but it is sensible and sustainable and works well for the average business owner.
TL;DR (Too Long; Didn't Read)
Organic growth is a business development strategy based on building internal strengths and capabilities rather than acquiring outside businesses.
Why Grow Organically?
The term "organic growth" is often used by investors when evaluating which stocks to buy. They focus on this business trait with good reason: Companies that grow organically actually do provide better rates of return than businesses that focus on external growth strategies. Even (or perhaps especially) for businesses that are closely held and will never make public stock offerings, organic growth is a common-sense strategy that is a safer bet than risky expansion into unfamiliar territory.
Like living organisms, a business that grows organically branches out at a rate that keeps pace with its surroundings. Unlike corporate mergers and takeovers, which are geared toward aggressive strides in reach and capability, organic business growth takes place step by step, gradually pushing the boundaries of an established comfort zone. You explore new territory slowly and carefully, building your knowledge and capacity at a rate you can maintain and afford.
Organic growth tends to be less expensive than core growth or inorganic growth, meaning that it does not require capital outlay for established add-ons to your company. Like a do-it-yourself home improvement project, an organically growing company will keep the bulk of its expenditures in house, using the resources and skills that are already available.
Types of Organic Growth
- Leveraging strengths. Every business has products, services and revenue streams that are better than others for its bottom line. Management accounting can provide you with detailed information about how much each of your offerings costs relative to the return it provides. With this data in hand, you can focus on investing in your most profitable endeavors and scaling back or completely eliminating those that provide less of a return. This process allows you to grow organically, building on the business model and infrastructure you already have.
- Introducing new products. You can also grow your business organically by introducing new offerings. Although new product development can be expensive, it is still usually more affordable to do the work and create the systems internally than to invest in a product that another business has already developed. Products that you develop and introduce yourself are also more likely to keep with your strengths and your brand, helping to build your company across the board.
- Continuous improvement. Whatever your business does, you can always find ways to do it better. You can invest in training, find ways to cut waste or spark creativity by looking at old questions in new ways. All of these strategies help your company to grow organically, drawing on what you already have to increase sales, improve margins and build your customer base.
Organic Growth Cycles
Like plants and animals, businesses aren't always positioned to grow. The startup phase is the part of a company's life cycle that is perhaps most interesting but is also most difficult in many ways. This is the time when you're figuring out how to do what you do and how to get customers to respond to it. The organic growth that takes place during a company's startup phase may come in fits and starts as you make rookie mistakes and also discover untapped potential.
Startup organic growth can come from refining your business model to make your company more profitable, developing products and services that showcase your strengths and attracting loyal customers who will sustain you into the future. Once your business operations stabilize, you may experience a period of growth in which organic expansion occurs smoothly and relatively effortlessly or as effortlessly as anything occurs when running a small business.
In this mature growth phase, you're no longer doing the hard work of developing a foundation, and you have a solid core on which to build. You'll need to keep investing in your infrastructure and your staff, but you'll be able to do so with some knowledge and experience regarding what works. You may bring in investors to help with these financial outlays, but this growth is still organic because they're supporting your core business model rather than looking for outside capacity to add.
About Organic Decline
Once your business matures, you may have difficulty maintaining the rate of organic expansion that you achieved during its growth phase. Although it may feel like your business is declining because you aren't maintaining the rate of rapid expansion that you experienced during the previous phase, you may actually be stabilizing and drawing on the foundation you already created.
A mature company may not show much organic growth simply because it is at a stage in its business life cycle when aggressive growth isn't necessary. However, if your sales start to drop off sharply, or you begin to lose market share, it may be time to start reinventing your brand and reinvest in the organic growth cycle.
Organic Growth Advantages
- Autonomy. Although some organic growth companies do bring in investors, this strategy requires considerably less outlay than externally based expansion, making you less beholden to other stakeholders who may not share your vision. If your organic growth is slow and steady, you may be able to finance it entirely with your own credit and resources, freeing you to run your business entirely as you see fit.
- Sustainability. It's easier to maintain an organic rate of growth than a trajectory geared toward external expansion. If you're looking to build a human-scale business rather than a juggernaut conglomerate, an organic growth strategy will be easier on your finances and most likely on your personal life as well.
- Reduced risk. The risk involved in an organically growing business is measured risk because expansion is incremental, and such a strategy builds on existing strengths and resources. You're investing in what you know rather than borrowing to merge your company with an unfamiliar entity.
Organic Growth Disadvantages
- Rate of expansion. If you're interested in building a multinational conglomerate, organic growth may not be the best approach for you. If you implement core, or externally based, growth strategies successfully, you have the potential to achieve phenomenal growth in a limited time frame provided you have the financial and technical resources to do so.
- Rate of return. It is unlikely that an organically growing business will achieve the same level of profitability as a successful company that expands via core growth. A core growth strategy isn't for everyone, but it may be right for some ambitious and experienced entrepreneurs.
Organic growth strategy advantages and disadvantages often come down to what you hope to achieve from running your business and your personal and professional vision of success. Not every entrepreneur needs to operate on a global scale or earn millions of dollars. You may be happier and more comfortable simply growing at a pace that is in sync with your goals and your values and building your skills and your company over time.
- McKinsey & Company: Mastering Three Strategies of Organic Growth
- Forbes: Business Life Cycle Spectrum: Where Are You?
- Business Zeal: What is Organic Growth in Business
- Hinge: How to Drive Organic Growth: 5 Proven Strategies for Professional Services Firms
- Walmart. "Earnings Release - 1.31.2020," Pages 1, 11. Accessed Sept. 21, 2020.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.