Acquisition vs. Organic Growth: Which Strategy Fits Your Business?
Wondering how to scale your business effectively? Explore the key differences between acquisition and organic growth strategies to make the best choice for your company's expansion.
For a business to achieve long-term success and become sustainable, it needs to grow and expand. Companies often face the critical decision of how best to achieve this growth. While many businesses focus primarily on organic growth, another route can offer more guaranteed results: acquisitions.
Both are established growth strategies for businesses and have their own merits and challenges, but how can you determine which one is best for your business? In this article, we define organic growth and acquisition, differentiating the two based on immediate concerns most business owners would want to know.
How does a business grow organically?
Organic growth is all about focusing on a company’s internal capacity. A company achieves growth through this approach by addressing functions and tasks which increase the capacity of the business, such as:
Optimising processes to reduce costs and set effective pricing strategies,
Reallocating resources to boost the production of best-performing products,
Introducing new goods or services to increase profits,
Building strategic corporate partnerships without mergers or takeovers.
Organic growth strategies can also extend to addressing company efficiencies, particularly functions and tasks that improve the business’s utilisation, effectiveness, and revenue without the extra resources. These functions include:
Refining IT systems, internal policies and procedures,
Increasing marketing reach and campaigns
Onboarding additional staff.
Organic growth means that a company is capable of improving and expanding its operations independently. This internal focus allows business owners to maintain control, though it tends to be a slower process compared to the rapid expansion possible through mergers and acquisitions.
What about inorganic growth through acquisition?
Inorganic growth happens when a company focuses on external activities to expand. This can take the form of mergers, acquisitions, or joint ventures to boost revenues. These strategies enable companies to access new markets, increase their earnings, and expand their market share much more quickly than what they’d achieve through organic means.
Acquisitions, in particular, are a common strategy for inorganic growth. This is when one company takes over the operational management of another. An acquisition growth means substantial financial investment, but it usually grants the acquiring company complete control. When a company faces physical or logistical constraints or has exhausted its resources, acquiring another firm can be more viable than attempting internal expansion. By incorporating promising young businesses into its operations, a company creates new revenue streams and opportunities for profit.
There are various strategic reasons for companies to acquire. One can acquire a supplier to reduce the costs per unit it needs to cover as production increases. Acquisitions can also enhance market share and enable expansion into new product lines, such as when a company purchases another brand in an industry different from its own. Companies also acquire other firms to obtain advanced technologies, saving years of capital investment and research and development efforts.
Comparing acquisition vs. organic growth
To help you make an informed decision, here is a more comprehensive comparison between these two growth strategies.
Growth Pace
Organic growth allows companies to scale their operations gradually and without overextending their resources. However, it can take considerable time and effort.
Acquisitions offer an immediate increase in market presence and revenue, as the acquiring company benefits from the established position of the acquired entity.
Cost
Organic growth generally requires less upfront capital compared to acquisitions. Since expenses are spread over time, it’s easier for companies to manage and budget for these costs.
Acquisitions involve high upfront costs, including purchase price, legal fees, and due diligence costs. Additional costs may arise during the integration process, such as aligning systems, training staff, and merging operations and cultures.
Risk
Because the investments are incremental, the financial risks are typically lower compared to acquisitions. Companies can adjust their strategies based on performance and market conditions.
Acquisitions carry significant financial risks, including the possibility of overpaying and failing to meet expected financial performance.
Cultural Impact
Organic growth allows a company to maintain and strengthen its existing culture, as changes are implemented gradually and internally. Employees also have time to adapt to changes.
Integrating different company cultures can potentially lead to conflicts and even resistance from employees of the acquired company. Reduced staff satisfaction under new management can make your company more vulnerable to high resignation rates.
Management
Companies typically retain their current management structure and processes. Gradual growth makes it easier to manage and implement changes without disrupting operations.
Acquisitions often involve merging different management teams, which can lead to power struggles and confusion. It can be challenging to aligning the strategic vision and management practices of both companies, eventually impacting overall performance.
Market Expansion
Entering new markets organically takes time, as companies need to build their presence and reputation from the ground up. Organic growth requires also a substantial effort to establish a foothold in new markets, including developing relationships and understanding local dynamics.
Acquisitions provide instant access to new markets, leveraging the acquired company’s established customer base and market knowledge. The acquiring company can quickly capitalise on the acquired company’s customer relationships and distribution channels.
Make the best choice with the help of a Stellar consultant
Choosing the right growth strategy requires business owners to carefully consider their company goals, current market conditions, the business’s financial health, risk tolerance, and cultural compatibility with the businesses they intend to acquire.
To ensure you develop the right strategy for your business—whether you’re looking to grow organically, purchase, or even sell your business—get expert guidance and support from Stellar Consulting.
Stellar consultants specialise in helping businesses navigate the challenges of growth and expansion. Our team is composed of experienced consultants and business owners with decades’ worth of experience, making us the best people to provide you with tailored solutions that ensure every decision you make aligns with your goals. Whether you're aiming to expand through internal efforts or looking to explore new markets through acquisition growth, Stellar offers the expertise and insight necessary to drive your business forward. Visit this page to learn more about our team.
