Saturday, December 21, 2013

Organic Growth Startups Won’t Scale Competitively

Microsoft-Intel-PartnersStartups are usually so focused on selling more of their branded product or service to their own customer base (organic growth) that they don’t consider the more indirect methods (non-organic growth) of increasing revenue and market share. Non-organic growth would include OEM relationships, finding strategic partners, “coopetition,” as well as acquisitions.

This initial focus is usually driven by limited financial and people resources, as well as the bandwidth of the executive team. Yet a creative and skilled team will often find that non-organic growth techniques can better leverage these limited resources.

An example of a startup which used non-organic growth early and effectively was Microsoft. Bill Gates started producing software solutions, like his Basic Interpreter and MS DOS, but quickly focused on adding thousands of small partners for applications, and major partners like IBM, Intel, and other hardware manufacturers. Even mergers and acquisitions (M&A) came quickly.

Some people feel that organic growth is “better” because it requires real innovation and sustained effort to create long-term competitive advantage through differentiation and efficiency. They might agree that it cannot compensate for the speed and scale of growth of the non-organic approach, but has lower risks of failure.

Despite the risks, there are many advantages of non-organic growth, even in startup environments:

  • New product or service lines. Organic growth assumes innovation in the product or service, but non-organic growth through white labeling and strategic partners may add totally new brands and services to your revenue stream.
  • Fresh customer base. Teaming with another company, or buying another company, can add new geographical locations and new customer segments to the business. These relationships need not require cash investments; often they are done with exchanges of equity or assets.
  • Economies of scale. In many cases business opportunities with competitors (coopetition) will open up a new marketing channel, and definitely give you the cost advantages of scale. Economies of scale also apply to marketing, distribution, and sales.
  • New management skills. New business relationships mean new perspectives and new executives working on the opportunity. This can be a significant competitive advantage over major competitors, and overall reduces competition in the market place.

I’m certainly not proposing that one mode should be used to the exclusion of the other. Rather, I recommend that you pursue both concurrently, per the advantages of each. For example, if you are in an industry which is fragmented or has a slowing growth rate, with too many competitors, non-organic growth may be required for survival.

Use organic growth options for things which you do best, where there is plenty of room for growth by selling your products in new geographic areas, or using new sales channels, such as through a wholesaler or website. Organic growth is typically safer because you’re using a tried-and-tested business model, and you can reinvest profits back into the business.

Certainly non-organic growth has its pitfalls. Entrepreneurs, while partnering with or acquiring a new business, must check for compatibility and strategic fit. Yet startups looking for investors need to evaluate all the growth alternatives from the very beginning. “No growth” or even slow-growth companies waiting for an Angel may have a long wait.

Marty Zwilling


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3 comments:

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  2. We have definitely fallen into this rut in our startup. Thanks for the article and ideas.
    Regards,
    http://FreshanaOrganic.com

    ReplyDelete
  3. As a startup, we have definitely fallen into some of the ruts described. Thanks for the ideas and article.
    Regards,
    http://FreshanaOrganic.com

    ReplyDelete