Growth Strategies enable organisation to follow an expansion route to boosts the profitability of the firm, or to develop new skills and markets. IMI decided to growth because of their high profit margins and excess cash available. There are two primary sections of growth which will be discussed in this section:
- Why do organisations grow?
- What is Organic Growth?
- Advantages and Disadvantages of Organic Growth,
- What is Inorganic Growth, and finally
- What is the difference between Organic and Inorganic Growth?
Why do organisations grow?
There are a myriad of reasons why an organisation wants to grow, and one of the primary reasons is to bring wealth to its shareholders via increased profits. Some of the other reasons why an organisation wants to grow are:
- Maximization of Profit (maximizing profit for shareholders),
- Providing a unique service which pertains to a ”gap” in the market,
- Expansion into new markets due to the current market becoming saturated with their product, or too many competitors (to survive),
Growth strategies are based on market structure and current state of market
What is Organic Growth?
(Louw & Venter, 2009) Defines the term as: Internal Growth as: Organic Growth (growth from within) or intensive growth, internal growth expands sales of existing products. The primary aim of organic growth is to retain the current customer base by providing them with new products or services, and seeking new customers. (Louw & Venter, 2009, pp. 215-216)
Ansoff’s matrix identifies the following growth areas: Market Penetration, Market Development, Product Development and Diversification.
Thus organic growth can be classified as the strategies which the organisation employs to grow from within the organisation. When an organisation uses organic growth as a growth strategy then it usually re-invests profits to increase production or operations capacity, which enables them the ability to sell more products to customers
What is Inorganic Growth?(Louw & Venter, 2009) Defines the term as: through diversification (external growth), an organisation adds new businesses to its current stable. A diversified business is synonymous with a multi-business organisation operating in two or more industries. Supplying new products, venturing into new markets or franchising other companies products are examples of diversification. (Louw & Venter, 2009, pp. 217-218)
Inorganic growth is growth factors from the external environment, which the organisation can do when they merge or acquire another firm.
Inorganic Growth can be accomplished in three ways:
- Acquisitions: Acquisitions entail the purchase of assets and skills of a takeover target.
- o (Smit, et al., 2011) States “When one organisation takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. The buyer organisation ‘swallows’ the other and the buyer’s shares continue to be traded (Smit, et al., 2011, p. 119)
- Mergers: Mergers entail the pooling of resources between two or more organisations of equal size
- o (Smit, et al., 2011) States a merger takes place when two organisations – of then of about the same size- agree to operate as a single new organisation.” Example of this the merger of Daimler-Benz and Chrysler to form DaimlerChrysler (Smit, et al., 2011, p. 119)
- Intraprises: Internally funded ventures (Intraprises) launched to exploit mew markets, products or services.
What is the difference between Organic and Inorganic Growth?
The primary differences between organic and inorganic growth is:
- Organic is on the basis of internal growth, while inorganic is bases on external factors(mergers, acquisitions),
- Organic especially prevalent during the early stages of a firm when new markets are built and products are being developed, while inorganic growth is usually prevalent during the later stages of the product life cycle,
- Organic Growth is usually often safer than inorganic (externally generated) growth because it can be more difficult and riskier to acquire and integrate another existing business into an existing company
- Organic Growth is usually a slower option compared to inorganic growth
An organisation must choose organic growth or inorganic growth for its growth strategies, based on where it is in the product life cycle. If the product is in its infancy stage then it is better to establish an organic growth strategy. But if the product is in the later part of the product life cycle then it is better to choose an inorganic growth strategy via diversification.
Bibliography
Louw, L., & Venter, P. (2009). Strategic Management - Winning in the Southern African Workplace (3rd ed.). Oxford - Southern Africa.
Smit, P. J., Cronje, G. J., Brevis, T., & Vrba, M. J. (2011). Management Principles (5th ed.). Juta.
Wilinson, N. (2005). Managerial Economics, A problem solving approach (1st ed.). Cambridge University Press.
