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Differences between organic and inorganic growth. Which one to carry out in my company?

When we have our own company, our first goal is to sell and then grow. In any case, this growth has to have a strategy behind it, so as not to fail in the attempt, but... What is the right one? How to choose it? Read this blog, and find out everything.

What strategy to carry out? Internal or external? Organic or inorganic?

First of all, we must clarify that organic makes relation to internal and inorganic, to external

Once this is clarified, we have to make the decision and many times it does not depend on a person or a desire, but on the path that the company or the sector traces. In other words, what phase of growth is it in, or if there is a saturation of the market itself, if competition has grown or not, if collaborations are exercised or by the amount of resources/capabilities we have, among other things. In this way, and after an exhaustive analysis, the decision can often be made alone. 

In any case, it is worth differentiating each strategy to better understand them.

Internal or organic growth strategies

Internal or organic growth, in general, occurs in a natural, gradual, progressive way, and worth the redundancy, organic. It is the slow and gradual implementation of different resources or strategies, such as the opening of a new location, the adhesion of new employees, the launch of a new product. So, thus, the marketing and localization processes can be maximized.

What difficulties do we have? A longer initial investment recovery process and possible difficulties in financing that growth.

To clarify the picture, let's give an example:

We have a shaped balloon stand in the park, with one person and an inflator that can produce 30 balloons per hour. Balloons are booming, both for the children who play there, and as gifts, which is why the stall is working better every time, lines are formed, customers wait because fun reasons are provided at a reasonable price. Seeing this growth, we consider that it is better to enlarge, therefore, we see a store in front of the square, which has great visibility and more space. In order to satisfy this opening, one more person is hired and another manual inflator and some automatic one that allows us to have balloons in stock.

This growth occurred organically, progressively. A balloon factory was not created overnight, nor did the business stay at the park stand.

In addition, we can implement two different strategies:

  1. Specialization strategy: we want to increase sales.
    1. Market penetration: we promote selling more products, for example with a 3×2.
    2. Development of new products: similar product promoted in the same market, that is, a variation. For example, same balloons but helium.
    3. Development of new markets: it can be geographical or for a group of clients. For example: traditional shaped balloons.
  2. Diversification strategy: different products in different markets.
    1. Horizontal or related: new product related to the one we already have. Example: Sell cards with balloons.
    2. Heterogeneous or unrelated: new products that are not related to the one we have. New product in a new market. For example: I sell chocolates in boxes with different shapes.
    3. Vertical: in the process, we implement an opening towards the front or back of what we do, for example: setting up a plastic factory to be able to make the balloons.

External or inorganic growth strategies

External or inorganic growth are those functions, acquisitions or strategic alliances that we carry out to grow between two or more companies, since many times, we cannot go out to the market to compete alone. This results in making a less risky investment, reducing costs due to economies of scale, acquiring bargaining power with suppliers/banks, increasing market power.

But... What difficulties do we have? All the cost of restructuring, acquisitions that have a high cost, purchase of unnecessary assets and, many times, problems of integration, whether cultural or control.

Continuing with the previous example, but with external growth:

I have a stand in the park that sells 30 themed balloons per hour, lines are generated by demand, we make a lot of money. Our biggest competitor is three blocks away, older and about to retire. He's not doing badly, but we're doing better, so we make him a purchase offer because we like his clients and his treatment. We acquire the new premises, we make improvements. We hired a person, we changed the rusty inflator that he has. But here comes the dilemma: do we leave their mark or do we put ours? Do we leave our position in the park working or move everything to the premises?

Here we can also implement two different strategies:

  1. Business cooperation / specialization: we grow based on technological and commercial agreements, etc.
    1. Joint Venture: Cooperation with another company developed in another market to be able to enter, thus the sales of both companies are divided into a 50%. For example: we want to open a balloon stand in another community, but the flower stand has a concession, and we join them.
    2. Cartel: it is illegal in most of the countries, because the manufacturers of the same sector indicate how much it costs for all. In this way, the product, production and price are imposed by a monopoly. This happens with oil.
    3. Temporary Union of Companies (UTE): different companies come together to create a single one for a certain time, project type, for example, in public works.
    4. Cluster: they are agreements of companies that are geographically in the same place and have a common objective, that is, they are mostly direct competition. For example: two Oxford universities to carry out a study.
  2. Business concentration: 
    1. Participation: when a company buys part of other companies, type holdings. Example: we buy shares of the helium factory in a 20%.
    2. Integration: Two or more companies come together and form a larger one. For example: the balloon stands in Madrid, is unified into a single parent company. It exists in different forms:
      1. Horizontal: we grow and unite with companies in the same sector. 
        • Fusion
        • Acquisition
      2. Vertical: we grow and buy/merge forwards or backwards in the production process.
        • Forward
        • Backward

In conclusion, we have to be very clear about what situation we are in and where and how our company is located, in order to know what strategy should we acquire: either a gradual, internal and organic growth, or a more rapid, external and inorganic growth.