Growth involves an element of risk taking and adventure that is often at odds with running a successful business. To be successful at growth, companies need to adopt a different paradigm. Instead of looking at ideas for growth on an individual investment go/no-go basis there should be a target of “We will grow X per day by a certain date”. Not only does this credible commitment to growth boost the company’s share price, it provides a target to achieve.
This new paradigm requires that companies get serious about growth and actively manage a programme to achieve the growth they desire. A growth strategy is a practically grounded investment programme and not necessarily a singular idea for examination.
Think wider
Many companies have become much more sophisticated in recent years in how to conduct mergers and acquisitions (M&As). Aided by armies of consultants and experienced practitioners (often themselves former consultants), companies are better equipped to develop a strategy, execute that strategy and integrate acquired companies into their company. They are armed with flashy PowerPoint documents, due diligence reports from big four accountants, and integration planning software and checklists in order to track the attainment of synergies.
However, having worked in this field for many years, I have come to realise that many people are either stuck in their ‘box’, bounded by their own rationality and rarely if ever venture outside of their piece of the M&A lifecycle. Or they work across the lifecycle but do so infrequently and often without the depth of experience necessary to be successful. This creates myopic and poor decision making because the whole growth programme is not looked at in an experienced and holistic manner.
Programme elements
A growth programme has five key elements:
• Strategy
Developing a prioritised list of growth options that have been selected through rigorous analysis of the triggers of growth, competition and the competencies required to deliver growth.
• Execution
To do new things, companies need to be able to develop new capabilities. These capabilities are bundles of people, processes, and technology that are glued together by culture. To do this companies use three tools: buying companies, building new capabilities and partnering with other companies. Of course, companies also divest assets in part to be able to reallocate resources to more attractive opportunities.
• Optimisation
Integrating acquired assets into the company, optimising the operation of capabilities that are built by the company, and ensuring the smooth operation of partnerships.
• Growth capacity
A growth programme is a major investment that can make or break the performance of the company. Very often sufficient resources are not devoted to this important investment activity. The development of a company’s capacity to grow through the acquisition of people, skills, processes and an appropriate incentive and governance structure ensures that the growth programme is set up for success.
• Political risk
Corporate development is often seen as a cost centre that does not generate current revenue or profitability. The political will to maintain a growth programme needs to be nurtured and maintained on an active basis.
Growing pains
These five elements come with their own risks:
• Strategic risk
There are risks that the identified triggers for growth (political, economic, social, technological, legal, environmental) do not create the size of market opportunity anticipated. Competition whether from new or existing companies and substitutes may also impact the opportunity in detrimental ways.
• Execution risk
Each tool to acquire new capabilities has its own advantages and disadvantages that can be predicted.
Buy Companies are bought with a premium that reduces the value to be obtained from the growth option. The desired asset may also be part of a bigger company so that the acquirer may need to buy assets at a premium that they do not want. The target may also be unavailable either because it does not exist or because it maybe ‘locked up’ as part of a bigger company making it unobtainable.
Build It can take time to move along the experience curve and develop the necessary competencies to move to an efficient level of production. Most companies are set up to efficiently operate a set of capabilities. Developing new capabilities requires new skills and investment. If the competency is close to existing competencies or if the company wants to do more of the same this can be the most attractive tool.
Partner There are many different types of partnership, from a contractual relationship through to an equity joint venture. The former have the advantage of being more flexible. In essence, you get what you pay for and if you are not happy you change supplier. This is particularly valuable for elements of an offer that have low strategic and financial value. Equity joint ventures are more difficult because they are defined by legal documents at the beginning of the partnership. This makes future course corrections and investment decisions more difficult to align against the partners new and differing
objectives. For divestitures, corporate development need to balance the expense of separation and the higher price for a fully separated asset with the likelihood and need for a quick(er) sale.
• Implementation risk
In addition to the risks of running and optimising a business, M&A and partnerships have the following additional risks: M&A integration risks are well known from not ‘doing the right deal’ and culture clash through to not realising synergies. Adopting the following eight best practices can increase the likelihood of doing the deal right: provide strategic clarity; control the integration; stabilise the workforce; address cultural priorities; optimise outsourcing; be ready for Day One; focus on synergy; and provide best-in- class project management.
• Capability risk
Many growth programmes are set up to fail because there is not a recognition of the need to build a company’s capacity to grow. In a previous article (‘A Better Way to Merge Companies’, Winter 2011) I discussed how companies can build their capability to conduct
M&As by having effective governance; appropriate corporate oversight; implementing effective strategic measurement and incentive programmes; and by following a step-by-step process.
In addition two other risks exist between the three elements:
• Strategic priorities
When a strategy is developed without the consideration of execution you get the proverbial ‘strategy in a vacuum’. Everyone knows this can happen but somehow it still does. For example, a recent client of mine, a Middle Eastern chemical company, engaged a leading pure play strategy firm and was considering acquisitions but did not factor in the availability of assets as they were mainly ‘locked up’ as part of a much bigger company. This had a major impact on what opportunities were practically viable.
• Operating model priorities
When execution does not take into account operating model priorities, additional capital expenditure and operating costs can derail the growth programme. This same Middle Eastern chemical company did not take into account operating model priorities when it was proposed to enter eight new markets while the assets being acquired were to remain joined-at- the-hip to their former owner on a global basis. Surely, this was a nightmare scenario for integration and optimisation of that new business. A growth programme that anticipates, plans for, and actively mitigates against these risks while building a coalition for implementation will be more likely to be successful.
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