Organic Growth Definition
Organic growth refers to the natural growth of a company, it is the growth rate realized through original and natural means such as improved production, improved advertising, and marketing, enhanced customer service, better delivery of service among others. The growth rate of a company achieved through internal processes and natural systems is called organic growth. Organic growth is different from inorganic growth because this form of growth does not result from mergers and acquisitions activities. As a business owner, if you drive growth and expansion in your business using internal operations and existing resources, this is organic growth.
A Little More on What is Organic Growth
When a business uses the organic growth strategy, it means internal systems and existing channels and resources are deployed in growing the business. It is growing a business internally, from within as against using external forces of mergers and acquisitions to drive business growth.
Organic growth strategy includes using unique organizational processes, improved customer service, enhance productions and marketing to drive growth. Oftentimes, investors are more interested in organic growth than they are in inorganic growth.
Organic growth also reflects the amount a company makes on its own without external forces from mergers and acquisitions. Despite that inorganic growth is desirable, it has its limits. Most companies however have diversified growth which results from the combination of organic and inorganic growth.
An Example of Organic Growth
Many firms have thieves and become successful through organic growth. For instance, in the United States, companies like Walmart and Costco thrive on organic growth otherwise known as comparable growth or comps. Through their coms reports, institutional investors and financial analysts are able to evaluate how much organic growth these firms have. In 2018 for example, the comparable growth (comps) of Walmart increased by 2.6%, this is a significant increase.
A Risk Analysis of Organic vs. Inorganic Growth
Oftentimes, what investors look out for in companies is their growth rate, only a few investors bother to look at whether the growth rate is organic or inorganic. Take this scenario; Company ABC has a growth rate of 8% while Company XYZ has a growth rate of 16%, investors are likely going to pick Company XYZ. However, Company XYZ may be growing as a result of mergers and acquisitions which might have been financed using debt, Company ABC on the other hand with 8% is organic growth.
Company ABC which is growing without mergers and acquisitions is exposed to fewer risks than Company XYZ whose growth is based on mergers and acquisitions. Looking at the risks involved, Company ABC is a better and safer investment than Company XYZ.