Oracle buys Sun, EMC buys Data Domain, Cisco buys Tandberg, it seems like every month another major billion dollar acquisition occurs. Part of this is because of the recent economic troubles, which now values many companies at the lowest they have been for many years and thus, making it cheaper to acquire good (and/or failing) companies. But one has to wonder is this the only way to grow?
I don’t think so.
Corporate growth can be purely internally driven or organic just as well as from acquisition. But it’s definitely harder to do internally. Why?
- Companies are focused on current revenue producing products – Revolutionary products rarely make it into development in today’s corporations because they take resources away from other (revenue producing) products.
- Companies are focused on their current customer base – Products that serve other customers rarely make out into the market from today’s corporations because such markets are foreign to the companies current marketing channels.
- Company personnel understand current customer problems – To be successful, any new product must address it’s customer pain points and offer some sort of a unique, differentiated solution to those issues and because this takes understanding other customer problems, it seldom happens.
- New products can sometimes threaten old product revenue streams – It’s a rare new product that doesn’t take market share aware from some old way of doing business. As companies focus on a particular market, any new product development will no doubt focus on those customers as well. Thus, many new internally developed products will often displace (or eat away at) current product revenue. Early on, it’s hard to see how any such product can be justified with respect to current corporate revenue.
- New products often take efforts above and beyond current product activities – To develop, market and sell revolutionary products takes enormous, “all-out” efforts to get off the ground. Most corporations are unable to sustain this level of effort for long, as their startup phase was long ago and long forgotten.
We now know how hard it can be but how does Apple do it? The iPod and iPhone were revolutionary products (at least from Apple’s perspective) and yet they both undeniably became great successes and helped to redefine industries in the process. And no one can argue that they haven’t helped Apple to grow significantly in the process. So how can this be done?
- It takes strong visionary leadership in the company at the highest level – Such management can make the tough decisions to take resources away from current, revenue producting products and devote time and effort to new ones.
- It takes marketing genius – Going after new markets, even if they are adjacent, requires in-depth understanding of new market dynamics and total engagement to be succesful.
- It takes development genius – Developing entirely new products, even if based on current technology, takes development expertise above and beyond evolutionary product enhancement.
- It takes hard work and a dedicated team – Getting new products off the ground takes a level of effort above and beyond current ongoing product activities.
- It takes a willingness to fail – Most new internally developed products and/or startups fail. This fact can be hard to live with and makes justifying future products even harder.
In general, all these items are easier to find in startups rather than an ongoing corporation today. This is why most companies today find it easier and more successful to grow through acquisitions rather than through organic or internal development.
However, it’s not the only way. ATT did it for almost a century in the telecom industry but they owned a monopoly. IBM and HP did it occasionally over the past 60 years or so, but they had strong visionary leadership for much of that time and stumbled miserably, when such leadership was lacking. Apple has done it over the past couple of decades or so but this is mainly due to Steve Jobs. There are others of course, but I would venture to say all had strong leadership at the helm.
But these are the exceptions. Strong visionary leaders usually don’t make it to the top of today’s corporations. Why that’s the case needs to be the subject of a future post…
One thought on “Is M and A the only way to grow?”
I’m so looking forward to that future post about visionary leaders not making it to the top of today’s corporations.
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