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Inorganic growth is when a business expands through means other than increased sales or cost cuts, such as merging with or acquiring other companies. Benefits include access to new technology, growing the customer base, and removing competition. Hostile takeovers are also a possibility.
Inorganic growth refers to a type of business growth that occurs for reasons other than the normal activities of a business. Growth of this type is not driven by increased sales of goods or services or by cost cuts that improve the company’s bottom line. Often, inorganic growth occurs when a business chooses to merge with a similar company or acquire other businesses as a means of expanding the overall operation.
There are many benefits to growing inorganically. One has to do with access to a technology the company doesn’t currently have. For example, an electronics company may choose to merge or acquire a competitor that has a reputation for developing innovative products. As a result of the merger, the company benefits from all new products developed and eventually marketed to consumers.
Another benefit of inorganic growth is that the approach often serves to grow the customer base by combining the existing firm’s customer lists with the acquired firm. In some cases, this means that the company has a presence in consumer markets that was previously not possible. Expanding your customer base in this way is generally considered a quick and relatively easy way to grow market share without spending a lot of time and resources on a major sales and marketing effort.
In some cases, inorganic growth is generated as a result of removing a primary source of competition from the market. Combining two major competitors under one umbrella typically means that consumers who haven’t dealt with either company in the past may choose to do business with the combined company, simply because there are fewer choices on the market. Again, the additional growth is created not by increasing sales effort, but as a result of the company’s changing status within the consumer market itself.
While inorganic growth is often accomplished by friendly mergers and acquisitions and seen as beneficial to all concerned, there are situations where the strategy involves a hostile takeover. In this scenario, the firm identifies a target company and begins to gain control of the business, often by buying as many shares in the target company as possible. Once the firm is in control of the interest in the target, it is a simple process to force the acquisition and use the acquired company in any way it envisages to generate the maximum amount of inorganic growth.
Smart Asset.
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