Organic vs Inorganic Growth Strategy? Which one to choose and When?

Organic vs Inorganic Growth Strategy? Which one to choose and When?

One of the frequent questions founders ask is how to resolve this 𝗯𝘂𝘆 𝘃𝘀 𝗯𝘂𝗶𝗹𝗱 conundrum.

𝗜𝘀 𝗶𝗻𝗼𝗿𝗴𝗮𝗻𝗶𝗰 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆 𝗮 𝗿𝗼𝘂𝘁𝗲 𝗳𝗼𝗿 𝗾𝘂𝗶𝗰𝗸𝗲𝗿 𝗺𝗮𝗿𝗸𝗲𝘁 𝘀𝗵𝗮𝗿𝗲/𝗴𝗿𝗼𝘄𝘁𝗵 𝗿𝗲𝗹𝗮𝘁𝗶𝘃𝗲 𝘁𝗼 𝗼𝗿𝗴𝗮𝗻𝗶𝗰?

1️⃣ In my view, if the firm intends to enter a new business segment related to its existing business, then the organic strategy works better, mainly if it is an excellent performer in its current industry. For instance, a 𝗳𝗶𝗿𝗺 𝘄𝗶𝘁𝗵 𝗮 𝘀𝘁𝗿𝗼𝗻𝗴 𝗯𝗿𝗮𝗻𝗱 𝘀𝗵𝗼𝘂𝗹𝗱 𝗶𝗻𝘃𝗲𝘀𝘁 𝗶𝗻 𝗶𝘁𝘀 𝘀𝗮𝗹𝗲𝘀 𝗳𝗼𝗿𝗰𝗲 𝗿𝗮𝘁𝗵𝗲𝗿 𝘁𝗵𝗮𝗻 𝗮𝗰𝗾𝘂𝗶𝗿𝗶𝗻𝗴 𝗳𝗶𝗿𝗺𝘀 𝘁𝗼 𝗴𝗮𝗶𝗻 𝗮𝗰𝗰𝗲𝘀𝘀 𝘁𝗼 𝗻𝗲𝘄 𝗰𝘂𝘀𝘁𝗼𝗺𝗲𝗿 𝗿𝗲𝗹𝗮𝘁𝗶𝗼𝗻𝘀𝗵𝗶𝗽𝘀.

2️⃣ A firm should decide if the inorganic strategy helps in either giving it a 𝗳𝗶𝗿𝘀𝘁 𝗺𝗼𝘃𝗲𝗿 𝗮𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲 𝗼𝗿 𝗰𝗮𝗻 𝗼𝘃𝗲𝗿𝗰𝗼𝗺𝗲 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗼𝗿𝘀 𝘄𝗵𝗼 𝗵𝗮𝘃𝗲 𝗮 𝗳𝗶𝗿𝘀𝘁 𝗺𝗼𝘃𝗲𝗿 𝗮𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲. For instance, if a firm has invested $10 million in blockchain for the last five years to build its market share. A competitor cannot dislodge the firm’s first mover advantage by investing organically worth $50 million in a single year. Instead, he is forced to consider inorganic growth.

𝗧𝗵𝗲 𝗽𝗼𝗽𝘂𝗹𝗮𝗿 𝗻𝗼𝘁𝗶𝗼𝗻 𝘁𝗵𝗮𝘁 𝗶𝗳 𝘀𝗽𝗲𝗲𝗱 𝗶𝘀 𝗲𝘀𝘀𝗲𝗻𝘁𝗶𝗮𝗹, 𝗶𝗻𝗼𝗿𝗴𝗮𝗻𝗶𝗰 𝗴𝗿𝗼𝘄𝘁𝗵 𝗴𝗮𝗶𝗻𝘀 𝗽𝗿𝗲𝗰𝗲𝗱𝗲𝗻𝗰𝗲 𝗼𝘃𝗲𝗿 𝗼𝗿𝗴𝗮𝗻𝗶𝗰 𝗴𝗿𝗼𝘄𝘁𝗵 𝗶𝘀 𝗳𝗮𝗹𝗹𝗮𝗰𝗶𝗼𝘂𝘀. The problem is the 𝘀𝗲𝗰𝗼𝗻𝗱 𝗺𝗼𝘃𝗲𝗿 𝗱𝗶𝘀𝗮𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲. If competitors have relevant assets and it is difficult for you to replicate them, or there is a substantial second-mover disadvantage for trying to build similar resources, then 𝗶𝗻𝗼𝗿𝗴𝗮𝗻𝗶𝗰 𝗴𝗿𝗼𝘄𝘁𝗵 𝗶𝘀 𝘁𝗵𝗲 𝗿𝗶𝗴𝗵𝘁 𝗼𝗽𝘁𝗶𝗼𝗻.

Inorganic growth strategy has its downsides – High control premium, loss of motivation of target employees and integration costs. If the 𝗺𝗮𝗴𝗻𝗶𝘁𝘂𝗱𝗲 𝗼𝗳 𝘁𝗵𝗲 𝘀𝗲𝗰𝗼𝗻𝗱 𝗺𝗼𝘃𝗲𝗿 𝗱𝗶𝘀𝗮𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲 𝗲𝘅𝗰𝗲𝗲𝗱𝘀 𝘁𝗵𝗲 𝗱𝗼𝘄𝗻𝘀𝗶𝗱𝗲𝘀 𝗼𝗳 𝘁𝗵𝗲 𝗶𝗻𝗼𝗿𝗴𝗮𝗻𝗶𝗰 𝗴𝗿𝗼𝘄𝘁𝗵 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆, 𝘁𝗵𝗲𝗻 𝗯𝘂𝘆𝗶𝗻𝗴 𝗶𝘀 𝗮 𝗯𝗲𝘁𝘁𝗲𝗿 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻 𝘁𝗵𝗮𝗻 𝗯𝘂𝗶𝗹𝗱.