Businesses grow over some time if it sells a massive output. It is a fundamental goal for every company to increase market share, profits, and revenue. This is what investors seek in a company.
Businesses often start with a positive mindset for the future, and there are two significant ways to achieve this — organic and inorganic growth. The main idea of these growths came from compounds and products such as food. For example, food such as meat and vegetables raised and grown using chemicals and pesticides are considered inorganic. In contrast, food raised using natural compounds like animal or vegetable fertilizers is organic.
Organic growth is a natural way of growing a company — when a business tries to expand its internal activities by innovating new products that have immense potential for customers’ support. Another term for organic growth is internal growth.
Businesses that are subject to growth started with one or a few products that customers supported. If this product already established a good posture in the market, it might be a wise business move to create the next set of related products.
For example, an established chocolate company started with a single milk chocolate product, which sold well. They decided to innovate related products for customers who prefer other flavors such as dark chocolate through research and development. Since people naturally have dynamic taste buds and competitions are always constant, they can still create dark chocolate or resort to mergers and acquisitions (inorganic growth) with stable companies that make dark chocolates.
Inorganic growth is the opposite since it expands through external resources and actions such as acquiring mergers, acquisitions, and takeovers.
A merger is the board of directors’ approval to make two companies with almost equal sizes forms a new legal company instead of working separately. Shareholders should also give their permission in this big decision.
Acquisition and merger get interchanged and mistaken often. A merger is a union, while an acquisition is a purchase. An acquiring company becomes the new owner after taking over a target company. The target company’s stocks become null and void. On the other hand, the acquiring can still buy and sell their stocks.
Pros and cons of organic and inorganic growth
A company that does not resort to mergers and acquisitions showcases good stature and stability in the market since it can withstand economic struggles and still make revenues. However, organic growth is often slow while being a work in progress.
A company that decides to choose the inorganic option can help a company in a very swift manner. However, this help can also be just a short-term solution. Let’s take the chocolate company as an example. Let’s say their milk chocolate showed a decline because people’s preference shifted to dark chocolate. So they’ve decided to purchase a company that sells dark chocolates. Later on, the dark chocolate products skyrocketed while their very own milk chocolate declined. Companies should be alert to grave internal problems as the acquisition can only mask a more significant dilemma for so long.