Strategies for Growth
The different routes to growth fall broadly into five options:
Organic growth
Mergers and acquisitions
Integration
Diversification
Specialisation
A) Organic growth
This is when a business grows from its own resources. Organic growth can happen because the market is growing or because a firm is doing increasingly better than its competitors or is going into new markets.
Exploiting a product advantage can sustain organic growth; examples are a law firm with a star partner or a software firm with a unique programme.
Organic growth normally requires launching new products or product extensions, entering new markets or establishing wider distribution networks and sales agency agreements, or licensing or franchising.
Organic growth depends on a number of things outlined below:
i) Core competences and capabilities
by identifying and exploiting synergies across different parts of an organisation's activities;
by structuring the organisation to take advantage of "priority" opportunities; and
by creating a culture that is able to spot opportunities when they arise and make the most of them.
ii) Planning
iii) Time
It requires patience, application and strong, focused leadership to keep the strategy on course and maintain support for it.
iv) Cash
Cash is needed to pay for expansion and new developments, either by taking on new staff, buying in new resources (such as it systems), developing and producing new products or undertaking marketing initiatives.
B) Mergers and acquisitions
The fastest route to growth is through an acquisition or merger. But more than half fail to add value and they are notoriously difficult to pull off
successfully.
One is that mergers between titans will result in an even larger titan, too cumbersome to operate flexibly and efficiently, which in many industries (and certainly for technology-based businesses) is vital. In this view, a merger results in:
more bureaucracy;
diminishing returns negating the benefits of increases in size and capacity for production;
diseconomies of scale, swallowing huge quantities of capital and causing organisational lethargy;
a lumbering giant that will be outpaced and outsmarted by smaller rivals.
The second, more optimistic, view is that mergers result in organisations that:
achieve economies of scale and are more efficient;
are stable and broadly based;
have the intellectual capital and management infrastructure that will allow them to deal effectively with market change.
They most closely resemble Herculean giants, gods among markets, operating with faultless precision, in-depth experience and fluid efficiency to maximise revenue.
This works best in industries where there are only a few main competitors.
We recognise that integrating two cultures–each with its own distinct heritage–is a challenge. But the success of the combined company depends upon building a strong common culture.
Fiorina believed that the merger would diversify both HP and Compaq, broadening their reach into different markets. . She believed that the combined company would be a formidable force benefiting from:
increased capital assets, enabling economies of scale;
opportunities to gain a hold or a share of a new market (whether identified by territory or product);
the opportunity to restructure and refocus the company;
additional channels to control the supply of goods and the supply to customers (as with mergers between companies in different sections of the supply chain);
diminished competition, as a result of two principal firms in a market merging to increase their market share.
Arguments against the merger
As the HP management statement of September 2001 accepted, without "a strong common culture" a merger is doomed to failure. Moreover, without sufficient planning pre- and post-merger it is likely to be fruitless, benefiting only competitors, and no more than a short-term measure. The long-term consequences can be significant, eroding shareholder value and destroying stakeholders' interests.
Hewlett, son of one of the company's founders and a significant shareholder, argued that the merger would dilute HP's hugely successful printing operation with a far lower margin PC business.
About two-thirds cited bad planning and execution as the reasons for the mergers failing to fully realise their supposed potential.
The establishment of a 600-strong HP-Compaq integration office to plan and co-ordinate the merger allowed many changes to be executed without a hitch, while also establishing damage control over what was always going to be a messy process.
Some mergers are defensive, initiated because the companies involved are under threat: McDonnell Douglas merged with Boeing because their main customer, the Pentagon, slashed expenditure by half. Mergers can also result from intensified globalisation: Chrysler merged with Daimler-Benz because they were warned about their ability to prosper in a global business environment.
Mergers that are more likely to work are those with clear advantages in mind, rather than those aiming to minimise disadvantages.
When planning a merger, this is a good premise from which to launch. Some companies merge so that they can hide their losses, some to gain capital assets, some to gain intangible assets and intellectual property, and some to reduce competition; but successful companies are always clear about advantages and do not ignore dissent among stakeholders.
The real test of success is perhaps the extent to which a merger provides a platform for future development.
However, problems are common following business mergers, with 48% of merged companies underperforming in their industry after three years, according to a 1997 report by Mercer Management Consulting.
Fewer than 50% of mergers ever reach anywhere near the economic or strategic destination that was envisioned for them. In fact, in many cases the mergers fail because the new company's managers underestimated, ignored, or mishandled the integration tasks.
Three stages of the merger or acquisition process
i) Planning and preparation
Decision 1: decide your strategy.
Decision 2: identify and select targets.
Decision 3: decide specific objectives and understand how issues affect them.
ii) Due diligence
Decision 4: price and structure the deal.
Decision 5: negotiate the deal.
iii) Post-acquisition planning and integration
Decision 6: plan early to realise the benefits of the deal.
Post-acquisition integration decisions should take into account:
the overall strategy of the business;
the culture and management styles of the two organisations;
issues of presentation, communication and understanding;
customer-focused market issues–it may be a grand plan, but how will customers, current and potential, react? Can this be turned to the acquirer's advantage?
people management issues, in particular motivation, empowerment and innovation;
Problems with the merger
1. Cultural issues.
2. Stakeholder issues.
3. Short-term issues.
4. Leadership issues.
5. Corporate identity and communications issues.
6. Potentially conflicting objectives.
So, is big beautiful?
Many commentators, such as management guru Tom Peters, view major mergers such as that between Daimler-Benz and Chrysler as a recipe for disaster. If a firm is strong, then a merger will introduce sources of weakness, or at best take attention and resources away from sources of strength. If a firm is weak, then it is better to focus on the sources of weakness rather than divert resources into negotiating and implementing a merger. There is an argument that rapidly enlarged businesses leave themselves open to leaner, quicker and less bureaucratic competitors.
C) Non-merger integration
One way to grow that does not involve merging is working more closely with other businesses in the same industry, through partnership deals, joint ventures or strategic alliances.
Integration can be vertical, involving organisations in the same industry but at different stages of the value chain (for example, PepsiCo linking up with restaurants that will sell its beverages). Vertical integration can provide businesses with greater control over the whole process of creating goods and or services and getting them to the customer.
In contrast, horizontal integration involves collaboration between organisations in the same industry; for example, a law firm in the United States forms alliances with law firms in many other countries in order to provide a more global service. Horizontal integration can provide economies of scale, as well as enhancing the size, expertise and credibility of both businesses.
The alliance must be structured so that it doesnot fall foul of antitrust laws and competition regulations, notably in Europe and the United States.
D) Diversification
Diversification involves a business moving into another area of activity. This can be either a new product in an existing market, for example an airline starting a low cost service, or a new product in a different market, for example an established airline buying a rail franchise and operating train services.
Diversification can be achieved with partners, as well as through the introduction of new finance, and can provide a number of benefits:
Over-reliance, or even dependence, on a small group of customers is removed and risk is spread.
The existing business can become more attractive, enhancing perception of the brand, customer service and market share.
Market share in both businesses can be improved, as synergies and marketing offers can be exploited.
There is some protection against changing fortunes in traditional markets which can result in short-term difficulties or long-term terminal decline.
The effect of a market exit will be less damaging if you operate in other profitable markets.
Diversification can provide new opportunities for existing skills and spare capacity.
For example, an advertising agency may set up a video production company producing corporate videos because it has the necessary skills and resources. This is known as concentric diversification, where existing skills, customers and sales channels are at the core, but the applications broaden in concentric rings.
E) Specialisation
The opposite of diversification, specialisation involves dropping non-core activities, or even redefining and focusing on core operations. The main
advantages are a clear focus and strength in depth, with all available resources channelled into one endeavour. It also means that any cash available from the sale of non-core operations can be used to grow the business.
The perils of growth
Growth is difficult to manage and it depends on having the necessary cash. Because of the lag between the time investments are made and when they start repaying, it is crucial to maintain the support of financial backers, keeping them informed.
Growth can disrupt existing processes and organisational structures and working methods. If such growing pains are not remedied quickly, they can have serious consequences. The solution is to identify all the things about the current business that work well and must be retained, as well as what needs improving. Explaining plans to customers and suppliers will help allay any concerns that they have.
Competitors may see a change in strategy or structure as an opportunity to attack, perceiving the growth initiative either as a sign of weakness or possibly heralding a period of strength that requires a pre-emptive strike. Competitors may feel stung into action to preserve their market position. Furthermore, growth can signal that the sector is doing well, encouraging competitors to enter the market or broaden their activities. The solution is to keep a close eye on the market–speaking to customers, for example–and to take decisive action in the event of any moves by competitors.
Another problem associated with growth is rising costs, most frequently administration costs, if there is duplication (in the case of M&A) or if the
administrative function becomes overstretched and inefficient. Other reasons for rising costs include over- or under-shooting capacity, with either too much inventory or not enough. In any strategy for growth, it is important to increase awareness of the need for cost control.
Key questions
The following questions can help when determining a strategy for growth:
Where are the most profitable parts of the business?
What are the prospects in the short, medium and long term for those other potentially profitable parts?
How precarious is the business? For example, does it rely on too few products, customers, suppliers, personnel or distribution channels?
How clearly focused is the business? Is it overburdened with too many products, markets and initiatives, or is it running on empty with too few opportunities on which to capitalise?
What is likely to be the best method of expansion, and is it affordable in terms of money, other resources and time?
What are the advantages and disadvantages of expanding, and what must be done to achieve the benefits and avoid the pitfalls?
What do people in the organisation see as the best options? What are their views of potential opportunities and difficulties?
Is there the commitment to act decisively and consistently? Once set, the course needs to be rigorously followed. One of the greatest obstacles to growth is inertia.
Do you understand how the changes will affect people? If employees feel threatened, disregarded or insecure, then no matter how sensible the decision and implementation it is likely to fail as people will not be sufficiently committed to it.
What are the success criteria and performance measures? How will these be monitored?
When considering a merger or acquisition the following issues are relevant:
How does the merger or acquisition fit with the business strategy?
What are the main issues faced in making the deal a success? In particular, what decisions are needed, and how will they be reached?
How will the best target be identified and decided upon? Are there other potential targets that would be better?
How well is the deal structured? Is the price reasonable and likely to provide a realistic return?
Where can you decide to compromise and what issues are non-negotiable?
How has the integration of the target business been planned? What are the main priorities and intended benefits, and how swiftly will these be realised?
How might issues of organisational culture affect the deal? How can you limit any negative effects–or, ideally, build on the cultural fusion?
Who is responsible for planning and communicating the deal, selling its benefits and establishing the identity and focus of the new business? How will they achieve this?
Have issues of corporate identity and communication been considered?
Is the leadership behind the deal ready to make the necessary decisions that will make or break it?
For more Information
* Competitive Strategy, Corporate Strategy, Company Analysis, Strategic Capability, Business Strategy Books, Business Growth and Profitability, Business Intelligence,*
The different routes to growth fall broadly into five options:
Organic growth
Mergers and acquisitions
Integration
Diversification
Specialisation
A) Organic growth
This is when a business grows from its own resources. Organic growth can happen because the market is growing or because a firm is doing increasingly better than its competitors or is going into new markets.
Exploiting a product advantage can sustain organic growth; examples are a law firm with a star partner or a software firm with a unique programme.
Organic growth normally requires launching new products or product extensions, entering new markets or establishing wider distribution networks and sales agency agreements, or licensing or franchising.
Organic growth depends on a number of things outlined below:
i) Core competences and capabilities
by identifying and exploiting synergies across different parts of an organisation's activities;
by structuring the organisation to take advantage of "priority" opportunities; and
by creating a culture that is able to spot opportunities when they arise and make the most of them.
ii) Planning
iii) Time
It requires patience, application and strong, focused leadership to keep the strategy on course and maintain support for it.
iv) Cash
Cash is needed to pay for expansion and new developments, either by taking on new staff, buying in new resources (such as it systems), developing and producing new products or undertaking marketing initiatives.
B) Mergers and acquisitions
The fastest route to growth is through an acquisition or merger. But more than half fail to add value and they are notoriously difficult to pull off
successfully.
One is that mergers between titans will result in an even larger titan, too cumbersome to operate flexibly and efficiently, which in many industries (and certainly for technology-based businesses) is vital. In this view, a merger results in:
more bureaucracy;
diminishing returns negating the benefits of increases in size and capacity for production;
diseconomies of scale, swallowing huge quantities of capital and causing organisational lethargy;
a lumbering giant that will be outpaced and outsmarted by smaller rivals.
The second, more optimistic, view is that mergers result in organisations that:
achieve economies of scale and are more efficient;
are stable and broadly based;
have the intellectual capital and management infrastructure that will allow them to deal effectively with market change.
They most closely resemble Herculean giants, gods among markets, operating with faultless precision, in-depth experience and fluid efficiency to maximise revenue.
This works best in industries where there are only a few main competitors.
We recognise that integrating two cultures–each with its own distinct heritage–is a challenge. But the success of the combined company depends upon building a strong common culture.
Fiorina believed that the merger would diversify both HP and Compaq, broadening their reach into different markets. . She believed that the combined company would be a formidable force benefiting from:
increased capital assets, enabling economies of scale;
opportunities to gain a hold or a share of a new market (whether identified by territory or product);
the opportunity to restructure and refocus the company;
additional channels to control the supply of goods and the supply to customers (as with mergers between companies in different sections of the supply chain);
diminished competition, as a result of two principal firms in a market merging to increase their market share.
Arguments against the merger
As the HP management statement of September 2001 accepted, without "a strong common culture" a merger is doomed to failure. Moreover, without sufficient planning pre- and post-merger it is likely to be fruitless, benefiting only competitors, and no more than a short-term measure. The long-term consequences can be significant, eroding shareholder value and destroying stakeholders' interests.
Hewlett, son of one of the company's founders and a significant shareholder, argued that the merger would dilute HP's hugely successful printing operation with a far lower margin PC business.
About two-thirds cited bad planning and execution as the reasons for the mergers failing to fully realise their supposed potential.
The establishment of a 600-strong HP-Compaq integration office to plan and co-ordinate the merger allowed many changes to be executed without a hitch, while also establishing damage control over what was always going to be a messy process.
Some mergers are defensive, initiated because the companies involved are under threat: McDonnell Douglas merged with Boeing because their main customer, the Pentagon, slashed expenditure by half. Mergers can also result from intensified globalisation: Chrysler merged with Daimler-Benz because they were warned about their ability to prosper in a global business environment.
Mergers that are more likely to work are those with clear advantages in mind, rather than those aiming to minimise disadvantages.
When planning a merger, this is a good premise from which to launch. Some companies merge so that they can hide their losses, some to gain capital assets, some to gain intangible assets and intellectual property, and some to reduce competition; but successful companies are always clear about advantages and do not ignore dissent among stakeholders.
The real test of success is perhaps the extent to which a merger provides a platform for future development.
However, problems are common following business mergers, with 48% of merged companies underperforming in their industry after three years, according to a 1997 report by Mercer Management Consulting.
Fewer than 50% of mergers ever reach anywhere near the economic or strategic destination that was envisioned for them. In fact, in many cases the mergers fail because the new company's managers underestimated, ignored, or mishandled the integration tasks.
Three stages of the merger or acquisition process
i) Planning and preparation
Decision 1: decide your strategy.
Decision 2: identify and select targets.
Decision 3: decide specific objectives and understand how issues affect them.
ii) Due diligence
Decision 4: price and structure the deal.
Decision 5: negotiate the deal.
iii) Post-acquisition planning and integration
Decision 6: plan early to realise the benefits of the deal.
Post-acquisition integration decisions should take into account:
the overall strategy of the business;
the culture and management styles of the two organisations;
issues of presentation, communication and understanding;
customer-focused market issues–it may be a grand plan, but how will customers, current and potential, react? Can this be turned to the acquirer's advantage?
people management issues, in particular motivation, empowerment and innovation;
Problems with the merger
1. Cultural issues.
2. Stakeholder issues.
3. Short-term issues.
4. Leadership issues.
5. Corporate identity and communications issues.
6. Potentially conflicting objectives.
So, is big beautiful?
Many commentators, such as management guru Tom Peters, view major mergers such as that between Daimler-Benz and Chrysler as a recipe for disaster. If a firm is strong, then a merger will introduce sources of weakness, or at best take attention and resources away from sources of strength. If a firm is weak, then it is better to focus on the sources of weakness rather than divert resources into negotiating and implementing a merger. There is an argument that rapidly enlarged businesses leave themselves open to leaner, quicker and less bureaucratic competitors.
C) Non-merger integration
One way to grow that does not involve merging is working more closely with other businesses in the same industry, through partnership deals, joint ventures or strategic alliances.
Integration can be vertical, involving organisations in the same industry but at different stages of the value chain (for example, PepsiCo linking up with restaurants that will sell its beverages). Vertical integration can provide businesses with greater control over the whole process of creating goods and or services and getting them to the customer.
In contrast, horizontal integration involves collaboration between organisations in the same industry; for example, a law firm in the United States forms alliances with law firms in many other countries in order to provide a more global service. Horizontal integration can provide economies of scale, as well as enhancing the size, expertise and credibility of both businesses.
The alliance must be structured so that it doesnot fall foul of antitrust laws and competition regulations, notably in Europe and the United States.
D) Diversification
Diversification involves a business moving into another area of activity. This can be either a new product in an existing market, for example an airline starting a low cost service, or a new product in a different market, for example an established airline buying a rail franchise and operating train services.
Diversification can be achieved with partners, as well as through the introduction of new finance, and can provide a number of benefits:
Over-reliance, or even dependence, on a small group of customers is removed and risk is spread.
The existing business can become more attractive, enhancing perception of the brand, customer service and market share.
Market share in both businesses can be improved, as synergies and marketing offers can be exploited.
There is some protection against changing fortunes in traditional markets which can result in short-term difficulties or long-term terminal decline.
The effect of a market exit will be less damaging if you operate in other profitable markets.
Diversification can provide new opportunities for existing skills and spare capacity.
For example, an advertising agency may set up a video production company producing corporate videos because it has the necessary skills and resources. This is known as concentric diversification, where existing skills, customers and sales channels are at the core, but the applications broaden in concentric rings.
E) Specialisation
The opposite of diversification, specialisation involves dropping non-core activities, or even redefining and focusing on core operations. The main
advantages are a clear focus and strength in depth, with all available resources channelled into one endeavour. It also means that any cash available from the sale of non-core operations can be used to grow the business.
The perils of growth
Growth is difficult to manage and it depends on having the necessary cash. Because of the lag between the time investments are made and when they start repaying, it is crucial to maintain the support of financial backers, keeping them informed.
Growth can disrupt existing processes and organisational structures and working methods. If such growing pains are not remedied quickly, they can have serious consequences. The solution is to identify all the things about the current business that work well and must be retained, as well as what needs improving. Explaining plans to customers and suppliers will help allay any concerns that they have.
Competitors may see a change in strategy or structure as an opportunity to attack, perceiving the growth initiative either as a sign of weakness or possibly heralding a period of strength that requires a pre-emptive strike. Competitors may feel stung into action to preserve their market position. Furthermore, growth can signal that the sector is doing well, encouraging competitors to enter the market or broaden their activities. The solution is to keep a close eye on the market–speaking to customers, for example–and to take decisive action in the event of any moves by competitors.
Another problem associated with growth is rising costs, most frequently administration costs, if there is duplication (in the case of M&A) or if the
administrative function becomes overstretched and inefficient. Other reasons for rising costs include over- or under-shooting capacity, with either too much inventory or not enough. In any strategy for growth, it is important to increase awareness of the need for cost control.
Key questions
The following questions can help when determining a strategy for growth:
Where are the most profitable parts of the business?
What are the prospects in the short, medium and long term for those other potentially profitable parts?
How precarious is the business? For example, does it rely on too few products, customers, suppliers, personnel or distribution channels?
How clearly focused is the business? Is it overburdened with too many products, markets and initiatives, or is it running on empty with too few opportunities on which to capitalise?
What is likely to be the best method of expansion, and is it affordable in terms of money, other resources and time?
What are the advantages and disadvantages of expanding, and what must be done to achieve the benefits and avoid the pitfalls?
What do people in the organisation see as the best options? What are their views of potential opportunities and difficulties?
Is there the commitment to act decisively and consistently? Once set, the course needs to be rigorously followed. One of the greatest obstacles to growth is inertia.
Do you understand how the changes will affect people? If employees feel threatened, disregarded or insecure, then no matter how sensible the decision and implementation it is likely to fail as people will not be sufficiently committed to it.
What are the success criteria and performance measures? How will these be monitored?
When considering a merger or acquisition the following issues are relevant:
How does the merger or acquisition fit with the business strategy?
What are the main issues faced in making the deal a success? In particular, what decisions are needed, and how will they be reached?
How will the best target be identified and decided upon? Are there other potential targets that would be better?
How well is the deal structured? Is the price reasonable and likely to provide a realistic return?
Where can you decide to compromise and what issues are non-negotiable?
How has the integration of the target business been planned? What are the main priorities and intended benefits, and how swiftly will these be realised?
How might issues of organisational culture affect the deal? How can you limit any negative effects–or, ideally, build on the cultural fusion?
Who is responsible for planning and communicating the deal, selling its benefits and establishing the identity and focus of the new business? How will they achieve this?
Have issues of corporate identity and communication been considered?
Is the leadership behind the deal ready to make the necessary decisions that will make or break it?
For more Information
* Competitive Strategy, Corporate Strategy, Company Analysis, Strategic Capability, Business Strategy Books, Business Growth and Profitability, Business Intelligence,*
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