If an organization wants to survive and succeed, businesses need to find ways to rapidly, radically, and measurably change their strategy, processes, and roles.
There are two methods to increase the revenue and profit of a company. First is external growth through mergers and acquisitions and second is internal growth through organic development. But Compare with external development, organic development is more important to an organization and shareholders. Organic development is where strategies are developed by building on and developing an organization’s own capabilities (Johnson, Scholes and Whittington 2009). It means the improvement of competitive power. Organic development might be the preferred strategic method for organizational.
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Definition of organic development
Organic development means an organization improve competition through internal resources to innovate and expand market share and achieve sustainable growth, rather than through mergers and acquisitions to increase sales revenue and profit. Its core idea is that the economy cannot rely on external force to achieve sustained growth. Organic technological progress is determinant to ensure sustained economic growth. Organic development is to enhance customer satisfaction, employee engagement, as well as the growth of business. It is development that relies on innovation, new products and services, customer growth.
Many companies use some form of organic development to extend their product lines or add to their service offerings. This approach to internal development is used by many large publicly held corporations as well as small firms. An example of the latter is Rosa Verde, a small but growing business serving the health care needs of San Antonio, Texas: This small company began with one person to serve the health care needs of inner-city residents. Dr.Lourdes Pizana started Rosa Verde Family Health Care Group in 1995 with only $10,000 obtained from credit card debt. She has used a strategy of organic development to propel the company. Today she has six clinics, 30doctors, and a team of other health care professionals (Dess,G., Lumpkin,G.T.and Eisner.A.B. 2008).
How was Dr. Pizana able to accomplish this in such a short time? That is because she has a good strategy. Firstly she pays attention to the company’s role in the community and links with community leaders. Secondly she hires nearly all her professional staff as independent contractors to control costs. The contracts include each professionals are paid based on the volume of work they do rather than a set salary. It can motivate her staff to work efficiently. The strategy is to grow the company from the inside out through high levels of service, commitment to the community she serves, and savvy leadership. It proves that organic development can be a successful strategy.
Importance of organic development
Organic development is a smart long-term strategy. It is created through economic value adder, strong and increasing sales, and cash flow from operations above industry averages. The organic development generated internally frequently results in better returns on investment, stock vale improvements, lower employee turnover, and numerous other benefits.
How is it measured?
It is obviously that performance and sustainable development of organic development is excellent. According to the statistics of CRSP, Professor Hess, the University of Virginia, after screening more than 800 listed companies which create high economic value in 1996-2006, found there are only 23 companies relied on organic growth to develop their business. And these companies maintain the sustainable organic growth and the rate of average annual revenue is up to 31%. The performance of the stock market is far more than the Kow Jones and S&P 500 index (Hess 2010). In the investment, the famous consulting firm, AT Kearney programmed the organic growth index of 31 financial institutions in the United States. In academic research, Professor Hess also founded the organic growth index (OGI) model. They help investors to measure and evaluate their organic growth.
How these 23 companies success by organic development? They measure finance, behaviors and key operational. They need to understand which areas of their businesses are not performing as efficiently as possible. The right metrics must be in place for both employee accountability and driving the right value-creating behaviors. Operational and behavioral metrics make accountability more transparent, fair, and objective and are mission-critical to long-term organic growth.
A good organic growth company not only measure a lot of different results, but they also do so frequently-daily or weekly in most cases-and their measurement systems are understood by their employees and are transparent. Companies that are world-class measurement companies include SYSCO, Best Buy, Walgreen, Stryker, Gentex, and PACCAR.
Let’s talk an example: Best Buy, is founded as an audio stereo equipment store, the company has grown to become the largest specialty retailer of name brand consumer home entertainment and home office electronics equipment. Best Buy has more than 600 stores and its revenue base of more than $27 billion. Its organic development has followed a traditional path: Open more customer locations fast, take market share from the competition, and then focus on operating costs and efficiencies. Best Buy does what it does very well. It opens stores efficiently and in the right locations. It uses technology to manage inventory selection, the supply chain, logistics, and merchandising and is leading edge in customer analysis, data mining, and customer segmentation. Best Buy is not trying to beat the discounters by selling commoditized products. Instead, it sells value added products that allow the company to make its margins while operating efficiently to generate an exceptional return on invested capital. In other words, Best Buy is a very good operating machine (Hess 2007).
There are 6 keys to achieve organic development. Firstly a company needs to set a standard to make the system of organic development clear. Secondly, make sure the records of organic development are correct. These records can help company to know how to use internal resource. Thirdly, they must have ability and structure of growth. Fourthly is that company should jump out the business cycle. This is a problem of most company on the market. They are like to increase investment in growth peak, but in trough they just focus on the rate of revenue. It leads to ignore the organic development. Fifthly, preventing fixed pattern and encouraging creative idea.
Advantage of organic growth compared with other external methods
There are two strategic methods those internal and external methods. Internal method is organic development and external methods include merger, acquisition, joint venture and partnership. ?
Compared to mergers and acquisitions, firms that engage in organic development can very easily control its own operation and needs only concentrate on one single business strategy and remain highly focused on that strategy. And firms are able to capture the value created by their own innovative activities without having to “share the wealth” with alliance partners or face the difficulties associated with different companies and merging corporate cultures. Another advantage is that company can always develop new products and services at lower cost and relies on their own resources rather than turning to external resources. All of advantages can reduces the risk of a company, makes them easier to manage (Sherman, Rowley and Armandi 2006).
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Organic development is preferred strategy to an organization
For lots of organizations, organic development is the primary method of strategy development. There are some reasons why this should be: (1) highly technical products in terms of design or method of manufacture lend themselves. Organic development is the best way to go to success. (2) Knowledge and capability development is enhanced by organic development. (3) The final cost of developing new activities internally is greater than that of acquiring other companies. (4) The rate of change of organic development is minimize the disruption to other activities and avoid the political and cultural problems of acquisition integration that can occur(Johnson, Scholes and Whittington 2009).
It is not possible that a company always keep fast growth. Most CEO considers it is mature stage of company. They give up seeking growth power from internal and turn to merger and acquisition. But it is a big mistake to give up organic development. Because buyer must give good strategy to make merger grow. There are only 36% case of merger is successful that they can make up the cost of purchase (Favaro 2012).
For years, strategy consultants have advocated that sustainable competitive advantages can be created by locating businesses, supplies, or labor pools. Likewise, economists have advacated the necessity of size, which created economies of scale. And the business education system and business press have extolled the merits of having an MBA degree.
For example, the Ritz-Carlto Leadership Center is a successful internal venture. Until a few years ago, being “Ritz-Carlton-like” was just a motivational simile. However, in 2000, the company launched the Ritz-Carlton Leadership Center, where it offers 12 leadership development programs for its employees and seven benchmarking seminars and workshops to outside companies. It also conducts 35 off-sit presentations on such topics an “Creating a Dynamic Employee Orientation.” and “the Key to Retaining and Selecting Talented Employees.”
Within its first four years of operation, 800 different companies from such industries as health care, banking and finance, hospitality, and the automotive industries have participated in the Leadership Center’s programs. And to date it has generated over $2 million in revenues. Ken Yancey, CEO of the nonprofit small-business consultancy, Scor, says the concept he learned, like “the three steps of service,” apply directly to his business. “Hotels are about service to a client,” he says. “And we are too.”
To give a few specifics on one of the Leadership Center’s programs, consider its “Legendary Service I” course. The topics that are covered include empowerment, using customer recognition to boost loyalty, and Ritz-Carlton’s approach to quality. The course lasts two days and costs $2,000 per attendee. Well-known companies that have participated include Microsoft, Morgan Stanley, and Starbucks.
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