What is the difference between organic and inorganic growth?



What is the difference between organic and inorganic growth?

 Today there are millions of companies out there, each growing at its own pace. Some are earning profits, some have still not reached their breakeven point and some have deep losses. However, every company incorporated has one common goal which is to grow the wealth of their shareholders. In the pursuit of this goal, the companies follow two kinds of routes:

 1. Organic Growth: Organic growth refers to the growth that a company witnesses when it focuses on minimizing its cost, increasing the output and simultaneously selling the company's product. A company following this strategy tries to include more product lines to its product base, works on better customer service and tries to get hold of internal factors that may help increase profitability. Few prominent examples include Apple Inc., Costa Coffee, and Dominos Pizza.

 Organic growth shows that the company's products are better than the peers in the industry as organic growth is possible only when the sales are increasing and the company is able to acquire more market share in terms total market share in the industry. Furthermore, the share price of a company that has grown organically is usually higher than one which has grown inorganically. This type of growth is less expensive and a company can grow at a comfortable rate which suits its existing organization structure and revenue model.

 2. Inorganic Growth: Inorganic growth refers to the growth that a company witnesses when it has either acquired or merged with another company. Inorganic growth focuses on using business synergies to improve the future prospects of a business. Acquiring or merging with another company helps you to expand your customer base, expand the product line, get access to improved technology and subsequently achieve economies of scale.

 Inorganic growth is a much faster way to achieve the company's desired mission and goals. It helps to increase brand value and goodwill in the market. Other than that the bigger size of net assets improves the capital borrowing capacity of the firm. However, there are many complications when two companies are merged and a large cost is incurred by the acquiring firm towards the acquisition, that might hinder the current cash flow of the company. 5 out of 6 mergers fail as there is difficulty in gaining the synergy between the two companies. For example, Jet Airways faced a lot of difficulty in managing its working capital and thereby had to shut down its operations.

 To know more about the Jet Airways case click on the link below:
https://www.rdhmfinance.com/2019/05/what-is-economic-standing-of-civil.html

 Clearly, many factors play a role in determining which route is suitable for a particular organization. However, a company should be more careful and critical about the acquisition and synergy cost in the case of inorganic growth.

 Thanks for reading!

For the latest updates follow @rdhmfinance on Instagram.

Comment on any query you had like me to address.

Comments

Post a Comment

Popular posts from this blog

What is a marketing funnel and how can you implement it in your business to increase sales?

Image
What is a marketing funnel and how can you implement it in your business to increase sales? "Yo dude, you need to increase your funnel size". Today, we will understand what does this phrase mean when some entrepreneur asks you to increase your funnel size. There are various ways of marketing available to capture potential customers, some being more effective than the other. A business's objective includes selling its product or service to maximum number of customers possible in order to garner the benefit of economies of scale and increase the revenue as well as the profit. Now, coming straight to the topic, a marketing funnel is a journey of any person who is the ultimate buyer of your product or service. The marketing funnel is so important that companies like Amazon, Ford, Bigbasket and Reliance Jio also use it. Observe the image below carefully that the funnel narrows down as you go down i.e. with each level of filtering the number of potential purchasers reduce. The ...
Read more

What factors to consider when taking a health insurance?

Image
What factors to consider when taking a health insurance? The following are the factors that need to be considered when taking a mediclaim or health insurance. Pre and post expenses:  The policies usually have a time frame under which the expenses are covered. You should see for how many days prior to diagnosis of illness and for how many days post diagnosis the expenses are covered. A good policy will cover 30 days pre-illness to around 90 days post illness expenses for a claim. Premium: There are many companies that offer these insurance policies, however you will notice that the premiums for the same sum assured will vary from company to company. Therefore, you should do a prior research about the premiums and then look for where you can save money. Bed or per day room charges: There are policies that will mention that we cover the hospitalisation expenses only if you use the general ward, however, better services are provided to people with private rooms. So, read the documents ...
Read more

Top 30 things to keep in mind when trying to start your first business?

Image
Have you been thinking of starting a business, but you get bogged down by the process, then you have landed to the right article. Listed below are the top 30 things to keep in mind when trying to plan and start your dream company: Product/Service: The first and foremost thing is to decide on what you plan to sell or provide to your clients. Basically, it is the idea that you want to implement. The way successful entrepreneurs approach this aspect is to solve a mass real life problem or a mass real life convenience that people didn't know they needed. Since business is something that you plan to do for a long period of time, choose a product or service that you are passionate about. This way your work doesn't feel like work but its fun to see things coming together. Sourcing of product/service: There are two options that you can either make your own product or ask a supplier for the same, but even if you are going to make your own product, in most cases you will have to get ra...
Read more