Inorganic growth arises from mergers or takeovers rather than an increase in the company’s own business activity. Firms that choose to grow inorganically can gain access to new markets through successful mergers and acquisitions. Inorganic growth is considered a faster way for a company to grow compared to organic growth.
Key Insights
- Inorganic Growth: Achieved from buying other businesses or opening new locations.
- Organic Growth: Internal growth the company sees from its operations, often measured by same-store or comparable sales.
- Acquisitions: Can immediately boost a company’s earnings and increase market share.
- Implementation Challenges: The integration of new technology or employees can take time.
- New Stores: Opening new locations can capitalize on high-traffic areas but may also cannibalize existing stores.
Methods to Achieve Inorganic Growth
Firms can choose to grow inorganically in several ways, including engaging in mergers and acquisitions and, in the case of retail or branch organizations, opening new stores or branches.
Mergers are challenging from an integration perspective. Acquisitions can be accretive to earnings, but the implementation of the technology or knowledge acquired can take time. In other words, deriving value from mergers and acquisitions can be more complex than merely claiming increased sales. Restructuring charges can significantly inflate expenses, and the purchase price of acquisitions can be prohibitive for some firms.
By opening new stores in profitable locations, businesses can leverage higher growth rates associated with these venues. However, improperly placed stores that cannibalize sales or lack enough traffic can actually drag on total sales.
Inorganic Growth vs. Organic Growth: Choosing the Best Path
Which is better, inorganic or organic growth? While inorganic growth, such as that from acquisitions, provides a substantial short-term boost, steady and slow organic growth is often viewed as superior for its demonstration of a company’s inherent ability to generate profit regardless of economic conditions. Moreover, debt financing often underpins inorganic growth, potentially obscuring other internal issues.
One of the most important measures of performance for fundamental analysts is growth, particularly in sales. Sales growth can result from promotional efforts, new product lines, and improved customer service—internal or organic factors. Growth in organic sales, often described in terms of comparable sales or same-store-sales in retail, occurs naturally and not through acquisitions or new store openings.
Advantages and Disadvantages of Inorganic Growth
If a company merges with another seeking inorganic growth, the company’s market share and assets increase. Immediate benefits include the additional skills and expertise brought by new staff and a greater likelihood of obtaining capital when needed. Additionally, it allows the company to quickly enlarge its market share.
However, there are also drawbacks such as the need for more management, potential directional changes of the business, additional debt, or risk from too rapid growth. Specifically, the high initial costs and challenges of managing acquisitions may prove significant.
Exemplifying Inorganic Growth
Imagine Company A, seeking an inorganic growth strategy. Company A acquires a software startup that provides a novel technology yet to be offered by competitors. Consequently, Company A delivers new technology to its customers and penetrates new markets previously established by the acquired company.
M&A as Inorganic Growth?
Yes, mergers and acquisitions are forms of inorganic growth. These strategies involve external efforts to scale the company by combining with other enterprises.
What is Balanced Growth?
Balanced growth involves the application of both organic growth to foster the company internally and inorganic growth through acquisitions to boost performance. While acquisitions can lead to swift sales growth and quicker cashflows, they may also be unpredictable. On the other hand, organic growth offers a dependable and familiar process with potentially slower yet steadier sales.
Performance Comparison: Organic vs. Inorganic Growth
According to a study by McKinsey, S&P 500 companies with higher organic growth frequently outperformed those with minimal organic growth at comparable levels.
Common Types of Inorganic Growth
Based on a PwC survey of 1,300 CEOs, 40% planned joint ventures to boost revenues, 37% considered mergers or acquisitions, 32% intended to collaborate with startups, and 14% aimed to sell businesses.
Related Terms: organic growth, M&A, market share, corporate cannibalism, balanced growth.
References
- McKinsey & Company. “The New Growth Game: Beating the Market With Digital and Analytics”.
- PwC. “Buy vs. Partner: Deciding When M&A or an Alliance Is the Right Path for Growth”.
